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Tag: Jomo Kwame Sundaram

  • Another Nobel for Anglocentric Neoliberal Institutional Economics

    Another Nobel for Anglocentric Neoliberal Institutional Economics

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    • Opinion by Jomo Kwame Sundaram (kuala lumpur, malaysia)
    • Inter Press Service

    KUALA LUMPUR, Malaysia, Oct 22 (IPS) – New institutional economics (NIE) has received another so-called Nobel prize, ostensibly for again claiming that good institutions and democratic governance ensure growth, development, equity and democracy.

    Jomo Kwame Sundaram

    Daron Acemoglu, Simon Johnson, and James Robinson (AJR) are well known for their influential cliometric work. AJR have elaborated earlier laureate Douglass North‘s claim that property rights have been crucial to growth and development.

    But the trio ignore North’s more nuanced later arguments. For AJR, ‘good institutions’ were transplanted by Anglophone European (‘Anglo’) settler colonialism. While perhaps methodologically novel, their approach to economic history is reductionist, skewed and misleading.

    NIE caricatures

    AJR fetishises property rights as crucial for economic inclusion, growth and democracy. They ignore and even negate the very different economic analyses of John Stuart Mill, Dadabhai Naoroji, John Hobson and John Maynard Keynes, among other liberals.

    Historians and anthropologists are very aware of various claims and rights to economic assets, such as cultivable land, e.g., usufruct. Even property rights are far more varied and complex.

    The legal creation of ‘intellectual property rights’ confers monopoly rights by denying other claims. However, NIE’s Anglo-American notion of property rights ignores the history of ideas, sociology of knowledge, and economic history.

    More subtle understandings of property, imperialism and globalisation in history are conflated. AJR barely differentiates among various types of capital accumulation via trade, credit, resource extraction and various modes of production, including slavery, serfdom, peonage, indenture and wage labour.

    John Locke, Wikipedia’s ‘father of liberalism‘, also drafted the constitutions of the two Carolinas, both American slave states. AJR’s treatment of culture, creed and ethnicity is reminiscent of Samuel Huntington’s contrived clashing civilisations. Most sociologists and anthropologists would cringe.

    Colonial and postcolonial subjects remain passive, incapable of making their own histories. Postcolonial states are treated similarly and regarded as incapable of successfully deploying investment, technology, industrial and developmental policies.

    Thorstein Veblen and Karl Polanyi, among others, have long debated institutions in political economy. But instead of advancing institutional economics, NIE’s methodological opportunism and simplifications set it back.

    Another NIE Nobel

    For AJR, property rights generated and distributed wealth in Anglo-settler colonies, including the US and Britain’s dominions. Their advantage was allegedly due to ‘inclusive’ economic and political institutions due to Anglo property rights.

    Variations in economic performance are attributed to successful transplantation and settler political domination of colonies. More land was available in the thinly populated temperate zone, especially after indigenous populations shrank due to genocide, ethnic cleansing and displacement.

    These were far less densely populated for millennia due to poorer ‘carrying capacity’. Land abundance enabled widespread ownership, deemed necessary for economic and political inclusion. Thus, Anglo-settler colonies ‘succeeded’ in instituting such property rights in land-abundant temperate environments.

    Such colonial settlement was far less feasible in the tropics, which had long supported much denser indigenous populations. Tropical disease also deterred new settlers from temperate areas. Thus, settler life expectancy became both cause and effect of institutional transplantation.

    The difference between the ‘good institutions‘ of the ‘West’ – including Anglo-settler colonies – and the ‘bad institutions’ of the ‘Rest’ is central to AJR’s analysis. White settlers’ lower life expectancy and higher morbidity in the tropics are then blamed on the inability to establish good institutions.

    Anglo-settler privilege

    However, correct interpretation of statistical findings is crucial. Sanjay Reddy offers a very different understanding of AJR’s econometric analysis.

    The greater success of Anglo settlers could also be due to colonial ethnic bias in their favour rather than better institutions. Unsurprisingly, imperial racist Winston Churchill’s History of the English-Speaking Peoplescelebrates such Anglophone Europeans.

    AJR’s evidence, criticised as misleading on other counts, does not necessarily support the idea that institutional quality (equated with property rights enforcement) really matters for growth, development and equality.

    Reddy notes that international economic circumstances favouring Anglos have shaped growth and development. British Imperial Preference favoured such settlers over tropical colonies subjected to extractivist exploitation. Settler colonies also received most British investments abroad.

    For Reddy, enforcing Anglo-American private property rights has been neither necessary nor sufficient to sustain economic growth. For instance, East Asian economies have pragmatically used alternative institutional arrangements to incentivise catching up.

    He notes that “the authors’ inverted approach to concepts” has confused “the property rights-entrenching economies that they favor as ‘inclusive’, by way of contrast to resource-centered ‘extractive’ economies.”

    Property vs popular rights

    AJR’s claim that property rights ensure an ‘inclusive’ economy is also far from self-evident. Reddy notes that a Rawlsian property-owning democracy with widespread ownership contrasts sharply with a plutocratic oligarchy.

    Nor does AJR persuasively explain how property rights ensured political inclusion. Protected by the law, colonial settlers often violently defended their acquired land against ‘hostile’ indigenes, denying indigenous land rights and claiming their property.

    ‘Inclusive’ political concessions in the British Empire were mainly limited to the settler-colonial dominions. In other colonies, self-governance and popular franchises were only grudgingly conceded under pressure.

    Prior exclusion of indigenous rights and claims enabled such inclusion, especially when surviving ‘natives’ were no longer deemed threatening. Traditional autochthonous rights were circumscribed, if not eliminated, by settler colonists.

    Entrenching property rights has also consolidated injustice and inefficiency. Many such rights proponents oppose democracy and other inclusive and participatory political institutions that have often helped mitigate conflicts.

    The Nobel committee is supporting NIE’s legitimisation of property/wealth inequality and unequal development. Rewarding AJR also seeks to re-legitimise the neoliberal project at a time when it is being rejected more widely than ever before.

    IPS UN Bureau


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  • The Global South in the New Cold War

    The Global South in the New Cold War

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    • Opinion by Jomo Kwame Sundaram (kuala lumpur, malaysia)
    • Inter Press Service

    KUALA LUMPUR, Malaysia, Sep 11 (IPS) – Marginalised and dominated economically by the Global North, developing countries must urgently cooperate to better strive for their shared interests in achieving world peace and sustainable development.

    Jomo Kwame SundaramCold War rivalry
    During the first Cold War between the US, NATO, and other allies, on the one hand, and the Soviet Union and its allies, the former prided itself on sustaining economic growth, especially during the post-war Golden Age.

    Since the 2008 global financial crisis (GFC), successive governments – led by Obama, Trump and Biden – have all strived to sustain full employment in the US. However, real wages and working conditions for most have suffered.

    Exceptionally among monetary authorities, the US Fed’s mandate includes ensuring full employment. However, without the US-Soviet rivalry of the first Cold War, Washington no longer seeks a buoyant, growing world economy.

    This has affected US relations with its NATO and other allies, most of which have been hit by worldwide economic stagnation since the GFC. Instead of ensuring worldwide recovery, ‘unconventional monetary policies’ addressing the ensuing Great Recession have enabled further financialisation.

    Interest rate hikes slow growth
    Since early 2022, the US has raised interest rates unnecessarily. Stanley Fischer, later IMF Deputy Managing Director and US Federal Reserve Bank Vice Chair, and colleague Rudiger Dornbusch found low double-digit inflation acceptable, even desirable for growth.

    Before the fetishisation of the 2% inflation target, other mainstream economists reached similar conclusions in the late 20th century. Since then, the US Fed and most other Western central banks have been fixated on inflation targeting, which has no theoretical or empirical justification.

    Fiscal austerity policies have complemented such monetary priorities, compounding contractionary macroeconomic policy pressures. Many governments are being ‘persuaded’ that fiscal policy is too important to be left to finance ministers.

    Instead, independent fiscal boards are setting acceptable public debt and deficit levels. Hence, macroeconomic policies are inducing stagnation everywhere.

    While Europe has primarily embraced such policies, Japan has not subscribed to them. Nevertheless, this new Western policy dogma invokes economic theory and policy experience when, in fact, neither supports it.

    The US Fed’s raising interest rates since early 2022 has triggered capital flight from developing economies, leaving the poorest countries worse off. Earlier financial inflows into low-income countries have since left in great haste.

    New Cold War contractionary
    The new Cold War has worsened the macroeconomic situation, further depressing the world economy. Meanwhile, geopolitical considerations increasingly trump developmental and other priorities.

    The growing imposition of illegal sanctions has reduced investment and technology flows to the Global South. Meanwhile, the weaponisation of economic policy is fast spreading and becoming normalised.

    After the Iraq invasion fiasco, the US, NATO and others often do not seek UN Security Council to endorse sanctions. Hence, their sanctions contravene the UN Charter and international law. Nonetheless, such illegal sanctions have been imposed with impunity.

    With most of Europe now in NATO, the OECD, G7 and other US-led Western institutions have increasingly undermined UN-led multilateralism, which they had set up and still dominate but no longer control.

    Inconvenient international law provisions are ignored or only invoked when useful. The first Cold War ended with a unipolar moment, but this did not stop new challenges to US power, typically in response to its assertions of authority.

    Such unilateral sanctions have compounded other supply-side disruptions, such as the pandemic, and exacerbated recent contractionary and inflationary pressures.

    In response, Western powers raised interest rates in concert, worsening the ongoing economic stagnation by reducing demand without effectively addressing supply-side inflation.

    The internationally agreed sustainable development and climate targets have thus become more unattainable. Poverty, inequality and precariousness have worsened, especially for the most needy and vulnerable.

    Limited options for South
    Due to its diversity, the Global South faces various constraints. The problems faced by the poorest low-income countries are quite different from those in East Asia, where foreign exchange constraints are less of a problem.

    IMF First Deputy Managing Director Gita Gopinath has argued that developing countries should not be aligned in the new Cold War.

    This suggests that even those walking the corridors of power in Washington recognise the new Cold War is exacerbating the protracted stagnation since the 2008 global financial crisis.

    Josep Borrell – the second most important European Commission official, in charge of international affairs – sees Europe as a garden facing invasion by the surrounding jungle. To protect itself, he wants Europe to attack the jungle first.

    Meanwhile, many – including some foreign ministers of leading non-aligned nations – argue that non-alignment is irrelevant after the end of the first Cold War.

    Non-alignment of the old type – a la Bandung in 1955 and Belgrade in 1961 – may be less relevant, but a new non-alignment is needed for our times. Today’s non-alignment should include firm commitments to sustainable development and peace.

    BRICS’s origins are quite different, excluding less economically significant developing countries. Although not representative of the Global South, it has quickly become important.

    Meanwhile, the Non-Aligned Movement (NAM) remains marginalised. The Global South urgently needs to get its act together despite the limited options available to it.

    IPS UN Bureau


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  • Neocolonial ISDS, Abused, Biased, Costly, and Grossly Unfair

    Neocolonial ISDS, Abused, Biased, Costly, and Grossly Unfair

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    • Opinion by Jomo Kwame Sundaram (kuala lumpur, malaysia)
    • Inter Press Service

    KUALA LUMPUR, Malaysia, Feb 07 (IPS) – Investor-State Dispute Settlement (ISDS) provisions in international trade and investment agreements – long abused by opportunists with means – are slowly being rejected by cautious governments.

    Jomo Kwame SundaramDeveloping country governments need to be much more wary of ISDS and its implications, and should urgently withdraw from existing commitments. They should expunge ISDS clauses in existing trade and investment agreements and exclude them from new ones.

    ISDS ripe for abuse
    ISDS allows a foreign investor to sue a ‘host’ government for compensation by claiming new laws, regulations and policies adversely affect expected profits, even if changed in the public interest. It involves binding arbitration without going to court.

    ISDS provisions are included in many free trade agreements (FTAs) and bilateral investment treaties (BITs). These were invoked in 84% of cases before the World Bank Group’s International Centre for Settlement of Investment Disputes (ICSID), the most used arbitration forum. Investment contracts and national investment laws are also invoked.

    ISDS decisions are made by commercial ‘for-profit’ arbitrators prone to conflicts of interest. Foreign investors can thus seek compensation amounting to billions of dollars via a parallel legal system favouring them.

    ISDS provisions in such agreements enable foreign investors to sue governments for billions of dollars in compensation by claiming changes in national law or policy will reduce profits for their investments.

    Neocolonial ISDS
    During the colonial era, imperial authorities often used concession contracts to grant private companies exclusive rights to extract resources, such as minerals and crops, or conduct other economic operations, including building infrastructure and operating utilities.

    Investments were protected by (colonial) law, and sometimes by investment contracts after independence. Companies might negotiate contracts with governments to get better terms. A tenth of the claims before the ICSID involved such contracts.

    Thus, ISDS perpetuates a colonial pattern of privileging the interests of foreign capital. The World Bank’s Foreign Investment Advisory Service (FIAS) has long promoted including ISDS in domestic investment laws. Thirty of the 65 countries it advised enacted new laws providing for such arbitration.

    Investment treaty arbitration started as a post-colonial innovation to protect the assets of former colonial powers from newly independent states. Investment arbitration rules deliberately privilege foreign investment over national law.

    ISDS abused, biased and corrupt
    ISDS encourages abuse and corruption. As legal fees and arbitration awards tend to be very significant for developing countries, when invoked, ISDS has a chilling effect intimidating host governments, often forcing them to concede or compromise regardless of the merits of the claims.

    Nigeria was ordered to pay US$11 billion to a British Virgin Islands company, Process & Industrial Developments (P&ID). P&ID had used ISDS to claim compensation from Nigeria for allegedly breaking gas supply and processing contract.

    When P&ID initiated ISDS proceedings in August 2012, it had not even bought a site for the gas supply facility. Yet, it claimed to be ready to fulfil its contractual obligations.

    Six years later, in November 2023, the English High Court ruled the contract in dispute was obtained fraudulently via secretive practices allowed by ISDS. The Court also ruled P&ID had bribed Nigerian officials, including its legal team then, to get the contract.

    Presiding English High Court Judge Knowles expressed “puzzlement over how the Tribunal failed to notice the serious irregularities” despite various “red flags” of fraud noted by others.

    Elsewhere, Pacific Rim Mining Corp, a Canadian company, had proposed a massive gold mine in El Salvador using water-intensive cyanide ore processing. Later, it claimed the government had violated its domestic investment law by not issuing a permit for the mine.

    The ICSID ultimately rejected the company’s claim, ordering it to pay two-thirds of the US$12 million El Salvador had spent on legal fees. But the company has refused to pay.

    Wake-up call ‘down under’
    The Australian Fair Trade and Investment Network (AFTINET) advocacy group has updated its brief supporting its call for the urgent review and removal of ISDS clauses in the country’s existing foreign trade and investment agreements.

    AFTINET has specifically urged the Australian Joint Standing Committee on Treaties (JSCOT) to review and amend the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA).

    The Australian Labor Party government, elected in May 2022, pledged not to include ISDS in new trade agreements, and to review such provisions in current agreements. Its brief focuses on ISDS provisions used by Australian mining billionaire Clive Palmer to sue Canberra.

    Registering his Zeph Investments in Singapore, Palmer has used AANZFTA ISDS provisions to get compensation from Australia in two matters. The first is his application for an iron ore mining lease in Western Australia.

    The second is against the authorities’ refusal of coal mining permits in Queensland for environmental reasons. Palmer has also made a third claim invoking the Singapore-Australia FTA, bringing his total claims to nearly A$410 billion.

    Despite the government’s policy against ISDS, the provision was not reviewed in the amended AANZFTA. AFTINET is urging Canberra to urgently remove its exposure to ISDS cases as Palmer’s actions have made this all the more urgent.

    ISDS abuses recognised
    The Palmer case has increased concerns about ISDS, especially the abuse of lack of transparency. Arbitration processes are typically closed-door, preventing public, including forensic scrutiny of business transactions and practices.

    AFTINET notes “excessive” ISDS claims have been growing, while Judge Knowles noted the “severe abuses” of ISDS in the Nigeria v. P&ID case “driven by greed”.

    The huge compensations sought and awarded have encouraged even more “long-shot, speculative ISDS claims”. Such claims are typically based on “loose” book-keeping and dubious projections and other calculations, easily falsified by well-paid accomplices.

    While the Australian government pledges no new ISDS commitments, but also wants to get rid of earlier ones, much more vulnerable developing country governments seem quite oblivious of the huge risks they are exposing their countries to!

    IPS UN Bureau


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  • World Bank Enables Private Capture of Profits, Public Resources

    World Bank Enables Private Capture of Profits, Public Resources

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    • Opinion by Jomo Kwame Sundaram (kuala lumpur, malaysia)
    • Inter Press Service

    KUALA LUMPUR, Malaysia, Dec 20 (IPS) – The World Bank insists commercial finance is necessary for achieving economic recovery and the Sustainable Development Goals (SDGs), but does little to ensure profit-hungry commercial finance serves the public interest.

    By failing to address pressing challenges within their purview, the second-ever Bretton Woods institutions’ (BWIs) annual meetings on the African continent, in Marrakech in October 2023, set the developing world even further back.

    Jomo Kwame SundaramThe International Monetary and Financial Committee, which oversees the International Monetary Fund (IMF), could not agree, by consensus, on the usual end-of-meeting ministerial communique for ‘geopolitical’ reasons. The Development Committee, which governs the World Bank Group, fared little better.

    New World Bank playbook
    Little was achieved on crucial outstanding issues of governance reform and sovereign debt. Implicitly acknowledging past failure, World Bank Governors endorsed a “new vision to create a world free of poverty on a livable planet”.

    After all, even the World Bank now acknowledges recent increases in global poverty have been the worst since the Second World War as economic stagnation, debt distress and inflation spread across the developing world.

    The Bank’s new Evolution Roadmap proposes a just energy transition plan to mobilise private capital to scale up, secure and deploy climate finance. This is mainly for mitigation, rather than adaptation, let alone losses and damages.

    The blueprint wants international financial institutions to help developing country governments de-risk private investments. For Muchhala, this reflects “the failure of the Bank’s wealthy shareholders to help ensure a more equitable multilateral system that is truly fit for purpose to meet the challenges of the 21st century”.

    Blending finance for private profits
    The strategy proposes ‘de-risking’ foreign investment with various types of ‘blended finance’ – such as co-financing, loan guarantees, political risk insurance or public equity co-investments – as well as complementary legal and other reforms.

    The Bank and its allies have been promoting ‘blended finance’ for development, the environment and global warming since before the 2008 global financial crisis. Their main recommendation has been to induce profit-seeking private capital to fill growing financing gaps.

    Undoubtedly, most poor developing countries have limited public resources to make needed social and environmental, including climate investments. In such arrangements, public funds are used to ‘de-risk’ or otherwise subsidise commercial finance, ostensibly to serve public policy priorities.

    However, private commercial involvement in public services and infrastructure is costly and risky for the public sector and citizens, by deploying limited public resources for private gain. Civil society and other critics have already expressed grave concerns about the new Roadmap.

    The World Bank Group also set up a Private Sector Investment Lab to scale up private finance in developing economies. It claims to be creating a “business enabling environment that unleashes private financing”.

    Billions to trillions
    The World Bank’s ‘billions to trillions’ slogan has been the pretext for privileging commercial finance as supposedly necessary to achieve the SDGs. But it has done little to ensure that such profit-seeking private investments will help achieve the SDGs or otherwise serve the public purpose.

    The Bank does not consider that profit-seeking private investments expecting attractive returns may not serve the public interest and priorities. Nor do they necessarily support desirable transformations. Worse, their economic, social and environmental consequences may be for the worse.

    The privatisation of previously public social services and infrastructure has worsened development and distribution. Unequal access to public services – increasingly linked to affordability and ability to pay – threatens hundreds of millions.

    Such blended finance arrangements have also contributed to the debt explosion in the Global South – exacerbating, rather than alleviating developmental, environmental and humanitarian crises.

    Debt distress spreading
    Developing countries are in their worst-ever debt crises, with debt service obligations higher than ever before. Current debt-to-GDP ratios are more than twice those of LICs before the 1996 HIPCs’ debt relief came into effect, and even higher than for Latin American nations before the 1989 Brady plan.

    Unlike the 1980s’ sovereign debt crises, market finance is now more important. Much more government debt from commercial sources involves relying on bond markets, rather than commercial bank borrowings.

    With official credit much less important, commercial finance has become much more important compared to the 1980s. Unlike official creditors, most private creditors typically refuse to participate in debt restructuring negotiations, making resolution impossible.

    Debt servicing costs equal the combined expenditure for education, health, social protection and climate. In Africa, debt servicing has risen by half. Debt service levels of the 139 World Bank borrowers are higher than during the heavily indebted poor countries’ (HIPCs) and Latin American debt crises peaks.

    Debt service is absorbing 38% of budget revenue and 30% of spending on average by developing country governments. In Africa, the levels are much higher, at 54% of revenue and 40% of spending!

    The BWIs’ joint debt sustainability framework insists debt-distressed economies must have lower debt-to-GDP ratios than other countries, limiting this LICs’ external ratio to 30% or 40%. This BWI policy effectively penalises the poorer and more vulnerable nations.

    In 38 countries with over a billion people, loan conditionalities during 2020-22 resulted in regressive tax reforms and public spending cuts. Less expenditure has hit fuel or electricity subsidies and public wage bills, deepening economic stagnation.

    Despite severe debt distress in many developing countries, no meaningful debt relief has been available for most. The most recent debt restructuring deals have left debt service levels averaging at least 48% of revenue over the next three to five years.

    Debt distress limits government spending capacity, desperately needed to address social and environmental crises. Hence, overcoming stagnation and achieving the SDGs will require much more debt cancellation, relief and borrowing cost cuts.

    IPS UN Bureau


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  • Rich Nations, IMF Deepen World Stagnation

    Rich Nations, IMF Deepen World Stagnation

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    • Opinion by Jomo Kwame Sundaram (kuala lumpur, malaysia)
    • Inter Press Service

    KUALA LUMPUR, Malaysia, Dec 13 (IPS) – With the US Fed raising interest rates, the world economy is slowing as debt distress spreads across the global South, increasing poverty worldwide to pre-pandemic levels, with the poorest countries faring worst.

    Extreme poverty continues to be high and is now worse than before the pandemic in low-income countries (LICs) and among those affected by fragility, violence and conflict. The promise of eradicating poverty worldwide by 2030 has become unachievable.

    Jomo Kwame SundaramThe Bretton Woods institutions’ (BWIs) annual meetings in Marrakech in October were only the second-ever in Africa. But the rich nations-dominated BWIs failed yet again to rise to the challenges of our times, setting Africa and the global South even further back.

    Instead of fostering cooperation to address the causes and effects of the contemporary catastrophe, neither the International Monetary Fund nor the World Bank governors could agree on joint communiques due to the greater politicisation of multilateral fora.

    Indebtedness immobilises governments
    Indebtedness and restrictive creditor rules prevent governments from spending more counter-cyclically to overcome the many contractionary tendencies of recent times, besides preventing them from addressing looming social and environmental crises.

    The G20’s largest twenty economies have urged strengthening “multilateral coordination by official bilateral and private creditors … to address the deteriorating debt situation and facilitate coordinated debt treatment for debt-distressed countries”.

    But its Common Framework to restructure debt has been roundly criticised by civil society, think tanks and even the World Bank on many grounds, including the paltry concessional credit relief offered to a few of the very poorest countries.

    In contrast, the G24 caucus of developing countries at the BWIs has emphasised the need for “durable debt resolution measures while collaborating on resolving the structural issues leading to such vulnerabilities.”

    But all those advocating purported solutions are not even trying to ensure fiscal space and public spending capacity for counter-cyclical efforts, let alone achieve the Sustainable Development Goals and national development objectives.

    Surcharges
    The IMF currently imposes additional charges on countries that do not quickly clear their debts to the Fund. Besides the usual fees and interest, borrowing countries paid over $4 billion in such surcharges in 2020-22, during the COVID-19 pandemic.

    Surcharges will cost debt-distressed countries about $7.9 billion over six years. The G24 has emphasised that surcharges are pro-cyclical and regressive, especially with monetary tightening.

    Governments have undertaken contractionary policies and cut imports for lack of foreign exchange. This deepens the problems of heavily indebted poor countries who cannot but count on the Fund for relief and solutions.

    At Marrakech, the governing International Monetary and Financial Committee decided to “consider a review of surcharge policies”. The G24 called for “a suspension of surcharges while the review – which we hope will lead to substantial permanent reduction or complete elimination – is being conducted.”

    Rich nations have been divided over surcharges. With Ukraine now among the top surcharge payers, following civil society criticisms, the Biden administration’s refusal to review surcharges in 2022 was heavily criticised by the US Congress.

    Deepening austerity
    IMF fiscal austerity measures of the 1980s returned with a vengeance after the 2008 global financial crisis, and then again during the Covid-19 pandemic from 2020. Most Fund loans require cutting the public sector wage bill (PSWB), the budget line to pay employees.

    Most wage earners in many LICs, including nurses, teachers and other social service workers, work for the state, directly or indirectly. Although much needed, these employees have been more likely to be targeted by such budget cuts.

    PSWB cuts may involve hiring or wage freezes, or limiting, or even cutting wages. These inevitably undermine government capacities and services. Fiscal consolidation has also involved raising more indirect, consumption taxes, and tax exemptions, e.g., for essential goods such as food.

    In 38 countries with over a billion people, loan conditionalities during 2020-22, the three years of the Covid-19 pandemic, meant regressive tax reforms and public spending cuts. PSWB and fuel or electricity subsidy cuts are also common demands worsening economic contractions.

    Austerity bound to fail
    But the IMF’s own research suggests such austerity policies are generally ineffective in reducing debt, their ostensible purpose. The April 2023 IMF World Economic Outlook acknowledged austerity programmes and fiscal consolidations “do not reduce debt ratios, on average”. Yet, its Fiscal Monitor still demands “fiscal tightening” of most developing countries.

    The new IMF-World Bank debt sustainability framework sets the LICs’ external debt-to-GDP ratio limit at 30% or 40%. It insists debt-distressed economies must have lower ratios than ‘strong’ countries, effectively further penalising the weak and vulnerable.

    Instead of enabling consistently counter-cyclical macroeconomic frameworks, the IMF’s current short-termist approach is mainly preoccupied with annual, or worse, quarterly balances, mimicking corporate reporting practices.

    Such short-termism further limits fiscal space, effectively preventing or deterring public sector investments requiring longer-term macroeconomic frameworks to realise benefits. This discourages ‘patient’ medium- to long-term investments required for national economic planning and transformation, essential for sustainable development.

    Restrictive debt and fiscal targets have meant even less public investment. This is typically required of borrowing countries as a credit conditionality. Annual IMF Article IV consultations cause other countries to also accept similar constraints to avoid Fund disapproval.

    While a few better-off economies enjoy full employment, most countries face further economic contraction, not least due to interest rate hikes led by the US Fed and their many effects. Instead of being part of the problem, the IMF should be part of the solution.

    IPS UN Bureau


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  • Action Delayed, Justice Denied by Voluntary ESG Approach

    Action Delayed, Justice Denied by Voluntary ESG Approach

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    • Opinion by Jomo Kwame Sundaram, Siti Sarah Abdul Razak (kuala lumpur, malaysia)
    • Inter Press Service

    KUALA LUMPUR, Malaysia, Oct 25 (IPS) – Policy approaches relying solely on voluntary actions to address urgent needs are unlikely to succeed. Depending on optional compliance to address global warming will not fix things in time.

    Regulation for transformation
    Tariq Fancy, former Chief Investment Officer for Sustainable Investing at BlackRock, had created a storm with his criticisms of ESG (environmental and social governance) ‘greenwashing’, remaining wary of voluntary corporate-led reforms.

    Jomo Kwame SundaramNevertheless, judicious and effective regulation based on ESG principles, combined with changing incentives and increased public awareness, can incentivize companies to do better.

    Fancy believes changing rules for better regulation is essential for better outcomes. Limiting greenhouse gas (GHG) emissions is essential to ensure responsible governance aligned with the long-term public interest.

    Investment managers have several responsibilities – including fiduciary duties, legal obligations, and financial incentives – requiring them to prioritize short-term profitability rather than sustainability.

    Fancy believes imposing financial costs will provide stronger incentives for corporations to pursue greener alternatives. After all, voluntary measures are rarely enough to ensure sufficient adoption of sustainable practices.

    Changing regulations to incorporate sustainability considerations should require portfolio managers to prioritize social and environmental concerns, and make choices supporting long-term sustainability goals.

    Profits not aligned with public interest
    Fiduciary duties oblige company managers to always act in the best interest of shareholder profits. This means ESG initiatives will only happen if they help, or at least do not hurt, profitability.

    Fancy noted managers are not allowed, by law, to sacrifice potential profits from shareholder investments. They are legally obliged to never sacrifice shareholder interests, especially profitability, for anything else.

    Social, cultural and media shifts in the West have undoubtedly influenced transnational business behaviour. The popularization of ESG discourses reflects these trends, but there is no strong evidence of their efficacy and positive impact.

    Fleeting episodes of public attention cannot even ensure long-term protection of the public interest. With managers constrained by their fiduciary duties, relying on corporations to do the right thing is neither reliable nor sufficient.

    Relying on corporate social or environmental responsibility may well become a distraction, delaying urgent and much-needed efforts. This failure underscores the need for government regulation and corporate compliance to achieve vital social and environmental goals.

    Quick fixes delay progress
    Fancy found many people believe safeguarding investment portfolios from climate risks prevents global warming. But safeguarding finance from climate risks is not the same as mitigating climate change.

    De-risking finance means protecting the financial value of an investment portfolio. This includes protecting against asset damage, or reducing the risk of lower investment returns, but certainly not climate change mitigation.

    Mitigating climate change requires proactive measures to reduce GHG emissions. This includes measures to generate and use clean, especially renewable energy.

    Financial protection is important for financial asset owners, but it cannot replace the efforts needed to fight climate change. Worse, believing such measures address the climate crisis serves to delay government interventions and other changes needed to do so.

    Climate inequity
    Climate change exacerbates inequality, which in turn delays progress. The intergenerational distribution of the burden of climate risks disproportionately affects younger and future generations.

    This deters proactive measures, as older generations are less inclined to spend more now for future generations who will suffer more from global warming. Instead, they may prefer measures to better adapt to its contemporary effects.

    Aside from younger and future generations, the more vulnerable will also bear its worst effects. Thus, for example, small farmers in developing nations will have to cope with increased droughts, floods and crop failures.

    Thus, further progress on climate change is delayed due to financial short-termist thinking, business interests, limited contemporary accountability for future consequences, as well as political and cost considerations.

    Developing nations, with much smaller per capita carbon footprints, typically lack resources, leaving them more vulnerable. Meanwhile, developed countries, the major historical greenhouse gas emitters, have more resources to slow and adapt to climate change.

    Can ESG principles help?
    Will businesses maintain commitments to ESG ‘principles’ over the long term? They are legally obliged to maximize shareholder interests, especially profits, and also know public interest, attention, sentiment and priorities are always changing.

    Business leaders may only commit to ESG principles in the long term if compelled to embrace them owing to the pecuniary costs of ignoring them. Obligations to other stakeholders – including investors, customers and employees – can also help sustain ESG commitments.

    Establishing clear governance arrangements for ESG oversight, setting measurable and achievable goals, reporting regularly, and ensuring comprehensive organizational accountability should also help.

    But ultimately, regulation should appropriately advance social and environmental responsibility, with such commitments sustained despite shifting public attention, fads and profit concerns.

    Are voluntary efforts enough?
    The COVID-19 experience has also taught us to prioritize proactive, systemic and mandatory measures, rather than rely solely on voluntary efforts. While voluntary efforts can advance sustainability efforts, the pandemic experience suggests they will not be sufficient to achieve needed changes soon enough.

    A systemic approach can induce businesses and individuals to do the needed. Policy interventions, especially regulation, are essential to drive systemic changes on a large scale, and to align businesses and individuals with ESG principles.

    Clear communications, transparency and collaboration – among governments, businesses and civil society – are crucial for achieving long-term sustainability and progressive social change.

    To control the pandemic, governments adopted ‘all of government’ and ‘whole of society’ approaches, imposing strict mandatory lockdowns, but also providing vaccinations to all, and support to the vulnerable.

    Similar top-down approaches may be needed to effectively address social and sustainability challenges. This could involve implementing regulations, standards and incentives promoting, even requiring, sustainable practices.

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  • Insider Expos頯f ESG Greenwashing

    Insider Expos頯f ESG Greenwashing

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    • Opinion by Jomo Kwame Sundaram (kuala lumpur, malaysia)
    • Inter Press Service

    KUALA LUMPUR, Malaysia, Oct 18 (IPS) – A senior manager of the world’s largest investment firm has ‘blown the whistle’ on ESG (environment, social and governance) ‘greenwashing’, especially on supposed climate finance.

    Wall Street whistle-blowerTariq Fancy was Chief Investment Officer (CIO) for Sustainable Investing at BlackRock, managing over $9 trillion in assets. Founded in 1988, headquartered in New York City, and with the world’s largest investment portfolio, BlackRock can move financial markets.

    Jomo Kwame SundaramHence, Fancy’s insider critique of corporate ESG pretensions – often associated with ‘responsible’ and ‘impact investing’ – has had a major impact. It has been seen as confirming and even elaborating on longstanding criticisms of ESG ‘greenwashing’.

    Rejecting ‘stakeholder capitalism’, shareholder capitalism guru Milton Friedman long emphasized that a corporation’s primary and sole duty is to maximize profits for shareholders.

    Managers are legally required to prioritize shareholder financial interests above all else. This means corporations must never sacrifice profits or their funds, however noble the cause.

    Ethical or responsible actions can only be justified if they enhance ‘shareholder value’. Thus, companies can take morally desirable actions to improve their ESG ratings only if and when they enhance profitability.

    As Friedman emphasized, corporate executives have strict fiduciary responsibilities under the law in ‘shareholder capitalism’ in the US, UK and elsewhere. Their managerial obligations and conduct thus limit potentially positive ESG impacts.

    Prioritizing their corporate fiduciary duties above all else, they cannot enhance social or environmental benefits without maximizing returns for shareholders. By law, social, community or national ethical duties or moral values must always be secondary.

    Is green financing progressive?
    Corporate practices respond to changing understandings of profit-maximization in the medium to long-term. With changing national and international requirements, companies may be able to maximize long-term financial gains by investing in sustainability.

    Thus, investing in green transitions – e.g., renewable energy or re-afforestation – can become profitable in the longer-term if the regulatory environment changes soon enough to sufficiently change incentives for long-term investments.

    So, long-term profitability can be enhanced at the expense of short-term gains if conducive regulations, incentives and deterrents are introduced early enough.

    Companies changing to more environmentally sustainable practices – like adopting solar panels, investing in re-afforestation, or other green initiatives – may thus become more profitable over the longer-term.

    But ‘business-as-usual’ investments are still likely to yield more short-term gains in the near-term. And stock markets are more interested in short-term corporate performance, undermining longer-term profitability considerations. Thus, short-termist corporate governance norms deter green transitions.

    Do green bonds accelerate green transitions?Larry Lohmann has shown how difficult it is to confirm that finance raised by companies issuing ‘green bonds’ is actually additional. It is often difficult to verify such bonds are funding new projects that would not have happened anyway.

    Sometimes, companies had already planned to make certain investments using conventional financing. With ready access to such finance, they would not have issued green bonds if not for the pecuniary advantages of doing so.

    In such circumstances, green bonds have the same results as conventional finance if not for the incentives to claim otherwise. Hence, green bonds cannot claim credit for green investments and transitions if they would have happened anyway by other means.

    This raises larger questions about the supposedly transformative impact of green bonds. Companies may even obscure environmentally unsustainable or even harmful practices by bundling them together with ostensibly ‘green’ investments.

    Thus, green bonds may finance certain genuinely sustainable or environment-friendly projects without changing the rest of their investment portfolios and business practices.

    Stock market discipline?
    Despite lacking strong supportive empirical evidence, advocates claim ESG-compliant stocks outperform non-compliant ones in the share market. Similarly, they claim such compliance improves overall ESG indicators and contributes significantly to achieving the Sustainable Development Goals.

    But there is no strong evidence that ESG-inspired stock market or corporate strategies have improved the environment, society or governance. After all, shareholders and companies prioritize short-term financial goals over longer-term considerations, including ESG and long-term profitability.

    Divestment of shares in companies which are not ESG-compliant may only have limited impact if others buy non-compliant stocks, especially after their prices have fallen.

    Also, even if some investors sell their shares in companies which are not ESG-compliant, it is unlikely the stock market will ‘green’ corporate behaviour more broadly.

    Such stocks are mere drops in the ocean of wealth and finance, and one cannot realistically expect the tail to ‘wag the dog’. In 2021, the world economy had $360 trillion worth of wealth, with nearly $6 trillion in private equity.

    Disciplining companies
    Divestment means selling shares and thus losing ‘voice’ in company governance. But for shareholder engagement, it is necessary to retain stock ownership. Holding stock gives shareholders voice which can be used to try to pressure companies to be more ESG-compliant.

    Without financially damaging effects for its reputation and share price, a company would not be compelled to become more ESG-compliant. Only significant stock price collapses – following massive share divestment due to reputational damage – are likely to motivate companies to become ESG compliant.

    Undoubtedly, adverse publicity for particular companies hurts their stock prices, at least temporarily. And this may force companies to improve their behaviour. But such success implies a ‘name and shame’ approach – not ESG-compliance – can be effective.

    And while some share prices may be more sensitive to adverse ESG publicity in some societies, there is no strong evidence this is true everywhere. Nor is there any strong evidence that systematic ESG reporting has generated desirable outcomes in most societies.

    Divestment may not strongly affect company profitability or share prices. But actions such as consumer boycotts directly influence company revenue and financial performance. This may prompt strong corporate responses due to their impacts on companies’ ‘bottom lines’.

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  • Don’t Count on PPP Solutions

    Don’t Count on PPP Solutions

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    • Opinion by Jomo Kwame Sundaram (kuala lumpur, malaysia)
    • Inter Press Service

    KUALA LUMPUR, Malaysia, Sep 27 (IPS) – In recent years, public-private partnerships (PPPs) have spread rapidly. While usually profitable for the private partners, PPPs have generally not served the longer-term public interest.

    PPPs as miracle all-purpose solution

    As Eurodad has shown, PPP financing has grown in recent years, particularly in the Sustainable Development Goals (SDGs) funding discourses. Adopted by the UN in September 2015, the SDGs endorsed PPP financing.

    Jomo Kwame Sundaram

    Earlier, the mid-2015 Third UN Conference on Financing for Development in Addis Ababa had failed to ensure adequate financing. This was mainly due to rich nations opposing a UN-led international tax cooperation initiative.

    Instead, PPPs were strongly endorsed in the 2015 Addis Ababa Action Agenda. Weeks later, SDG17 referred to PPPs as ‘means of implementation’. This all sought to “encourage and promote effective public, public-private and civil society partnerships”.

    PPPs have been promoted as a means to finance and deliver infrastructure, social services and, increasingly, climate-related projects. Advocates claimed PPPs would also help overcome other problems besides funding. PPPs, they claimed, would help improve project selection, planning, implementation and maintenance.

    PPP promotion

    Some advocates even claim only the private sector can deliver high-quality investment and efficiency in infrastructure and social service delivery. Private financing reduces budget-constrained governments’ need to raise funds upfront to finance, develop and manage projects.

    Increased private financing supposedly also overcomes public sector incapacity to deliver high-quality infrastructure and public services. Undoubtedly, many government capacities have been diminished by decades of structural adjustment, austerity and less public finance.

    This has been worsened by rich countries’ unmet commitments to contribute 0.7% of national income as official development assistance (ODA) on concessional terms. The global North has also been unwilling to effectively stem illicit financial outflows, e.g., due to tax dodging.

    PPP promotion has involved many means, media and institutions, including ‘donor’ agencies, multilateral development banks (MDBs), UN agencies, international consultants, transnational accounting firms, and the World Economic Forum (WEF).

    The World Bank has long promoted private financial investments in development, as well as ‘blended finance’ and PPPs more recently. In 2022, the influential WEF even proclaimed PPPs as essential for pandemic recovery.

    Promoting private finance

    Such promotion of private finance has implications far beyond the actually modest amount of funds raised through ‘blended finance’ and PPPs. Almost every project so funded is touted as proof that private finance should be privileged, including by guaranteeing returns using public finance.

    The World Bank and other MDBs are devoting considerable effort to advise governments on the use of PPPs. By contrast, they have not put comparable efforts into improving the quality and effectiveness of publicly financed infrastructure and social services.

    Over the years, the World Bank Group has produced different tools – including model language for PPP contracts, which favour private sector interests – often to the detriment of the public partner, ultimately governments in need of financing.

    Regional development banks – such as the Asian Development Bank, the African Development Bank and the Inter-American Development Bank – have strategic frameworks, networks and dedicated offices to support countries implementing PPPs.

    National PPP promotion

    PPP advocacy has led to changes in laws, regulatory frameworks and policy environments at international, national and local levels. Developing countries have also started including PPPs – to scale up infrastructure and public service provision – in national development plans.

    Many developing countries have enacted laws enabling PPPs and set up ‘PPP Units’ to implement PPP projects. The World Bank, International Monetary Fund (IMF) and regional development banks work closely with private partners to provide policy guidance advising governments on how to best enable PPPs.

    All this has transformed policy formulation for public service provision to attract private investors – an agenda Daniela Gabor dubs the ‘Wall Street Consensus’. This implies “an elaborate effort to reorganize development interventions around partnerships with global finance”.

    PPPs have not delivered

    But actual experiences have not confirmed this favourable impression promoted by PPP advocates. Instead, PPPs have become a major cause for concern. Reliable data on international PPP trends are hard to find. Also, different PPP definitions and terminology have confused reporting.

    The World Bank’s Private Participation in Infrastructure Projects Database reports on economic infrastructure – such as for energy, transport, water and sewerage – in 137 low- and middle-income countries.

    The Covid-19 pandemic undoubtedly disrupted PPP planning, preparation and procurement. But even the World Bank admits that delays and cancellations were not only due to Covid-19 as the pandemic exposed projects already in trouble for other reasons.

    Nonetheless, PPPs’ financial impacts to date have been small, as the public sector continues to dominate. But little private investment – including PPPs – goes to low-income countries. Most such projects are concentrated in a few countries.

    PPPs tend to be found in countries with large and developed markets allowing faster cost recovery and more secure revenues. This implies market ‘cherry-picking’ – a selection bias – with private investments going to more affluent urban areas rather than to the needy.

    The major setbacks to both the SDGs and climate progress in the last decade are not only due to financing. But they are more than enough to underscore that recent reliance on blended finance and PPPs has worsened, rather than helped the situation. The empire of private finance has no clothes!

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  • Dangerous Scramble for Renewable Energy Resources

    Dangerous Scramble for Renewable Energy Resources

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    • Opinion by Jomo Kwame Sundaram (kuala lumpur, malaysia)
    • Inter Press Service

    KUALA LUMPUR, Malaysia, Sep 20 (IPS) – The growing and changing material requirements for new technologies have triggered natural resource scrambles for strategic minerals, generating dangerous rivalries fought out in the global South.

    Scrambles for resources
    Jayati Ghosh, Shouvik Chakraborty and Debamanyu Das have analyzed these new scrambles for mineral resources in developing countries triggered by major new innovations since the electronics boom.

    Jomo Kwame SundaramNatural resources here refer to naturally occurring solid, liquid or gaseous materials in or on the Earth’s crust. When extracted and exported commercially, they are considered primary commodities.

    All technologies – both peaceful and military – have specific material requirements. For example, energy transitions need particular minerals for renewable energy generation, transmission and storage.

    New technologies, with specific material requirements, are changing the nature of rivalries – among states, corporations and individuals – seeking to control these mineral resources.

    Feasible mass use of renewable energy requires extracting needed natural resources, which incurs costs and has adverse consequences. Commercial feasibility implies profitable extraction of desired minerals.

    Thus, addressing global warming by generating more energy from renewable sources – while desirable and necessary – in turn generates new problems and challenges which need to be addressed.

    Rare earths
    Despite their name, rare earth elements (REE) may not actually be scarce. But most REE are difficult and costly to extract as they are usually found together with other minerals. Unsurprisingly, REE demand and supplies have changed greatly in recent years.

    For the time being, demand for at least 17 ‘rare earth’ minerals is expected to grow. The inter-governmental International Energy Agency (IEA) projects supplies of some critical minerals will increase at least 30-fold over the next two decades.

    Extracting lithium and other such minerals also has very problematic environmental implications. Mined all over the world, REE are usually processed and separated by several stages of often complex and costly extraction and chemical processing, with many harmful to the environment.

    China currently leads the world in rare earth production, with over a third of the world’s known REE reserves. While Chinese companies dominate some supplies, China’s rare earth imports currently exceed its exports.

    Nevertheless, China dominates ‘downstream’ processing of REEs. Chinese companies control over 85 per cent of the costly REE processing processes. Unsurprisingly, China also accounts for over 70% of the world’s photovoltaic solar panel production and over 90% of its silicon wafer manufacturing.

    Lithium
    Lithium is one of the minerals over which control has been hotly contested. Lithium is particularly needed for processes to replace mechanical energy generation using fossil fuels. It is also needed for many industrial, office and household appliances, including rechargeable batteries, electric vehicles and electronic goods.

    Batteries – including rechargeable lithium-ion electrical grid storage devices – account for three-quarters of current supply. The IEA’s Sustainable Development Scenario expects demand to rise 42-fold in less than two decades!

    In 2021, there were almost 89 million tons of known lithium resources, mainly in developing countries. For decades, lithium mining has been very controversial, largely due to increasingly better known adverse environmental impacts.

    As pure lithium is very chemically reactive, it is often mined as ore, as in West Australia. It is also obtained from salt flats and brine pools in the southern cone of South America, particularly in Bolivia, Chile and Argentina.

    For decades, China has led the world in lithium mining. Australia and the US were second and third by the start of the pandemic, with 12% and 9% respectively. While Australia is the world’s largest exporter, lithium is mainly and increasingly mined in developing countries by a relatively few companies.

    Undermining communities
    REE mining has adversely impacted various ecosystems and communities. Mineral deposits may have to be raised from subterranean sources, or ‘concentrated’ by evaporation.

    Such techniques typically deplete, contaminate and otherwise reduce access to fresh water. Local water systems – used by people, animals, including livestock, and plants, including crops – are often badly compromised as a consequence.

    Extractive mining and related operations have worsened such environments. But mining companies can often get their way with impunity, often intimidating communities with the help of local politicians, government officials and police.

    Such ecological damage has devastated forest and vegetation cover, caused biodiversity loss, and compromised hydrological systems. Thus, extractive operations often involve abuses, with adverse effects for local communities.

    Economic gains to local communities are typically modest compared to mining’s adverse consequences. Benefits largely accrue to local ‘enablers’ while costs vary within communities with circumstances.

    The authors also urge majority government ownership of mineral extracting and processing companies. This will reduce foreign reliance and meddling, including by big powers such as the United States and China.

    Government transparency and accountability, including independent audits, can help ensure less adverse consequences and fairer compensation for all involved.

    This also prevents elite capture, abuse and deployment of mineral rents in their own interest. Avoiding such abuses is necessary to ensure resource rents actually advance sustainable development, as Bolivia is striving to do.

    Sustainability undermined?
    New frontiers for mineral extraction are emerging, especially as innovation creates new extraction and processing possibilities. This implies a vicious circle as global warming becomes both cause and effect of such mineral extraction.

    Mining practices threaten ecological fragility and vulnerability. Similarly, polar and seabed exploration and mining may well trigger disastrous environmental consequences, including mass extinctions of vulnerable polar and marine life.

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  • Finally, a Real Chance for International Tax Cooperation

    Finally, a Real Chance for International Tax Cooperation

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    • Opinion by Jomo Kwame Sundaram (kuala lumpur, malaysia)
    • Inter Press Service

    KUALA LUMPUR, Malaysia, Sep 06 (IPS) – After decades of resistance by rich nations, African governments successfully pushed for the United Nations to lead on international tax cooperation. All developing countries and fair-minded governments must rally behind this initiative.

    UN leadership
    The official UN Secretary-General’s Report (SGR) was mandated by a UN General Assembly resolution, unusually adopted by consensus in late 2022.

    All countries must now work to ensure progress on financing to achieve the Sustainable Development Goals (SDGs) and climate justice after major setbacks due to the pandemic, war and illegal sanctions.

    Jomo Kwame SundaramRich countries had blocked an earlier tax cooperation initiative at the Addis Ababa Financing for Development (FfD) summit in mid-2015. With grossly inadequate funding, the SDGs were condemned to a still birth.

    The SGR on options to strengthen international tax cooperation is, arguably, the most important recent proposal – remarkably, from a beleaguered and much ignored UN – to enhance FfD for SDG progress.

    It proposes three options: a multilateral tax convention, an international tax cooperation framework convention, and an international tax cooperation framework. The first two would be legally binding, while the third would be voluntary in nature.

    Eurodad proposal
    In response, the European Network on Debt and Development (Eurodad) has made a proposal – supported by the Global Alliance for Tax Justice (GATJ) – noting: “It is time for governments to deliver … … cooperate internationally to put an end to tax havens and ensure that tax systems become fair and effective.

    “International tax dodging is costing public budgets hundreds of billions of Euros in lost tax income every year, and we need an urgent, ambitious and truly international response to stop this devastating problem.

    “We believe the right instrument for the job is a UN Framework Convention on International Tax Cooperation and we call on all governments to support this option…

    “For the last half century, the OECD has been leading the international decision-making on international tax rules and the result is an international tax system that is deeply ineffective, complex and full of loopholes, as well as biased in the interest of richer countries and tax havens.

    “Furthermore, the OECD process has never been international. Developing countries have not been able to participate on an equal footing, and the negotiations have been deeply opaque and closed to the public.

    “We need international tax negotiations to be transparent, fair and lead by a body where all countries participate as equals. The UN is the only place that can deliver that.”

    A big step forward?
    Strengthening international tax cooperation is expected to be the major issue at the one-day UN High-level FfD Dialogue on 20 September 2023.

    A UN resolution on international tax cooperation – for General Assembly debate after September 2023 – should plan a UN-led inter-governmental process. After all, developing such solutions is a key purpose of the multilateral UN.

    The Africa Group at the UN had appealed for a Convention on Tax in 2019, to help curb illicit financial outflows. After all, such tax-related flows are international problems, requiring multilateral solutions.

    International tax cooperation should be inclusive, effective and fair. The EURODAD-GATJ proposals deserve consideration by all Member States negotiating a UN tax convention. The outcome should include:
    • Create an inclusive international tax body. The Convention should create international tax governance arrangements, using a Conference of Parties (CoP) approach, with all countries participating as equals. Currently, international tax rules are decided in various bodies where developing countries never participate as equals.
    • Enable an incremental approach to achieve other intergovernmental agreements. The outcome should be a framework convention, with basic structures, commitments and agreements enabling further updating and improvements later.
    • Incorporate developing countries’ interests, concerns and needs to achieve tax justice. The Convention should address developing countries’ interests, concerns and needs, replacing current tax standards and rules favouring wealthier nations.
    • Enhance international coherence. The Convention should develop a coherent system for all nations, including developing countries. It should eventually replace the plethora of existing bilateral and plurilateral tax treaties and agreements with a coherent overall framework. This should improve effectiveness and cut tax dodging.
    • Strengthen international efforts against illicit financial flows, especially involving tax avoidance and evasion, with simpler, more coherent and straightforward rules and standards to improve transparency and cooperation among governments.
    • Eliminate transfer pricing. The Convention should eliminate transfer pricing by replacing existing rules enabling such abusive practices.
    • Tax transnational corporations globally. Transnational corporations’ consolidated profits should be taxed on a global basis. Tax revenue should be distributed among governments with a minimum effective corporate income tax rate based on a fair and principled agreed formula recognizing developing countries’ contributions as producers.
    • End coerced acceptance of biased dispute resolution processes. The Convention should not require countries to accept biased processes, such as binding arbitration, favouring those who can afford costly legal resources. Effective dispute prevention would reduce the need for dispute resolution. Alternative mechanisms for resolving disputes could also be negotiated – using inclusive and transparent decision-making processes – under the Convention.
    • Enhance sustainable development and justice. The Convention should promote progressive taxation at national and international levels. It should ensure improved international tax governance supports government commitments and duties, especially relating to the UN Charter and Sustainable Development Goals.
    • Improve government accountability. The Convention should ensure transparent and participatory tax decision-making, with governments held accountable to national publics.
    • Ensure transparency. The Eurodad proposal emphasizes the ‘ABC of tax transparency’, i.e., Automatic Information Exchange, Beneficial Ownership Transparency, and Country-by-Country reporting.

    Actual progress will not come easily, especially after the strong-arm tactics – used by the G-7 group of the biggest rich economies and the Organization for Economic Cooperation and Development (OECD) – to impose its tax proposals at the expense of developing countries.

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  • UN Must Reclaim Multilateral Governance from Pretenders

    UN Must Reclaim Multilateral Governance from Pretenders

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    • Opinion by Jomo Kwame Sundaram (kuala lumpur, malaysia)
    • Inter Press Service

    KUALA LUMPUR, Malaysia, Aug 24 (IPS) – International governance arrangements are in trouble. Condemned as ‘dysfunctional’ by some, multilateral agreements have been discarded or ignored by the powerful except when useful to protect their interests or provide legitimacy.

    Economic multilateralism under siege
    Undoubtedly, many multilateral arrangements have become less appropriate. At their heart is the United Nations (UN) system, conceived in the last year of US President Franklin Delano Roosevelt’s presidency and World War Two.

    Jomo Kwame SundaramThe 1944 UN conference at Bretton Woods sought to build the foundations for the post-war economic order. The International Monetary Fund (IMF) would create conditions for lasting growth and stability, with the World Bank financing post-war reconstruction and post-colonial development.

    The Bretton Woods agreement allowed the US Federal Reserve Bank (Fed) to issue dollars, as if backed by gold. In 1971, President Richard Nixon repudiated the US’s Bretton Woods obligations. With US military and ‘soft’ power, widespread acceptance of the dollar since has effectively extended the Fed’s ‘exorbitant privilege’.

    This unilateral repudiation of US commitments has been a precursor of the fate of some other multilateral arrangements. Most were US-designed, some in consultation with allies. Most key privileges of the global North – especially the US – continue, while duties and obligations are ignored if deemed inconvenient.

    The International Trade Organization (ITO) was to be the third leg of the post-war multilateral economic order, later reaffirmed by the 1948 Havana Charter. Despite post-war world hegemony, the ITO was rejected by the protectionist US Congress.

    The General Agreement on Tariffs and Trade (GATT) became the compromise substitute. Recognizing the diversity of national economic capacities and capabilities, GATT did not impose a ‘one-size-fits-all’ requirement on all participants.

    But lessons from such successful flexible precedents were ignored in creating the World Trade Organization (WTO) from 1995. The WTO has imposed onerous new obligations such as the all-or-nothing ‘single commitment’ requirement and the Agreement on Trade-related Intellectual Property Rights (TRIPS).

    Overcoming marginalization
    In September 2021, the UN Secretary-General (SG) issued Our Common Agenda, with new international governance proposals. Besides its new status quo bias, the proposals fall short of what is needed in terms of both scope and ambition.

    Problematically, it legitimizes and seeks to consolidate already diffuse institutional responsibilities, further weakening UN inter-governmental leadership. This would legitimize international governance infiltration by multi-stakeholder partnerships run by private business interests.

    The last six decades have seen often glacially slow changes to improve UN-led gradual – mainly due to the recalcitrance of the privileged and powerful. These have changed Member State and civil society participation, with mixed effects.

    Fairer institutions and arrangements – agreed to after inclusive inter-governmental negotiations – have been replaced by multi-stakeholder processes. These are typically not accountable to Member States, let alone their publics.

    Such biases and other problems of ostensibly multilateral processes and practices have eroded public trust and confidence in multilateralism, especially the UN system.

    Multi-stakeholder processes – involving transnational corporate interests – may expedite decision-making, even implementation. But the most authoritative study so far found little evidence of net improvements, especially for the already marginalized.

    New multi-stakeholder governance – without meaningful prior approval by relevant inter-governmental bodies – undoubtedly strengthens executive authority and autonomy. But such initiatives have also undermined legitimacy and public trust, with few net gains.

    All too often, new multi-stakeholder arrangements with private parties have been made without Member State approval, even if retrospectively due to exigencies.
    Unsurprisingly, many in developing countries have become alienated from and suspicious of those acting in the name of multilateral institutions and processes.

    Hence, many in the global South have been disinclined to cooperate with the SG’s efforts to resuscitate, reinvent and repurpose undoubtedly defunct inter-governmental institutions and processes.

    Way forward?
    But the SG report has also made some important proposals deserving careful consideration. It is correct in recognizing the long overdue need to reform existing governance arrangements to adapt the multilateral system to current and future needs and requirements.

    This reform opportunity is now at risk due to the lack of Member State support, participation and legitimacy. Inclusive consultative processes – involving state and non-state actors – must strive for broadly acceptable pragmatic solutions. These should be adopted and implemented via inter-governmental processes.

    Undoubtedly, multilateralism and the UN system have experienced growing marginalization after the first Cold War ended. The UN has been slowly, but surely superseded by NATO and the Organization for Economic Cooperation and Development (OECD), led by the G7 group of the biggest rich economies.

    The UN’s second SG, Dag Hammarskjold – who had worked for the OECD’s predecessor – warned the international community, especially developing countries, of the dangers posed by the rich nations’ club. This became evident when the rich blocked and pre-empted the UN from leading on international tax cooperation.

    Seeking quick fixes, ‘clever’ advisers or consultants may have persuaded the SG to embrace corporate-dominated multi-stakeholder partnerships contravening UN norms. More recent SG initiatives may suggest his frustration with the failure of that approach.

    After the problematic and controversial record of such processes and events in recent years, the SG can still rise to contemporary challenges and strengthen multilateralism by changing course. By restoring the effectiveness and legitimacy of multilateralism, the UN will not only be fit, but also essential for humanity’s future.

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  • Mining Revenues Undermined

    Mining Revenues Undermined

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    • Opinion by Jomo Kwame Sundaram (kuala lumpur, malaysia)
    • Inter Press Service

    KUALA LUMPUR, Malaysia, Aug 09 (IPS) – The primary commodity price boom early this century has often been attributed to a commodity ‘super-cycle’, i.e., a price upsurge greater than what might be expected in ‘normal’ booms. This was largely due to some minerals as most agricultural commodity price increases were more modest.

    This minerals boom improved many developing country growth records, not least in Africa. With growing pressures to act urgently in response to accelerating global warming, mitigation efforts have been stepped up, promising energy transitions to reduce greenhouse gas emissions.

    Jomo Kwame Sundaram

    These require major shifts from fossil fuel combustion to renewable energy and complementary (e.g., transport) technologies. This energy transition requires more of specific minerals like lithium, copper and cobalt. This increased demand for minerals offers resource-rich economies more opportunities for greater domestic resource mobilization for development.

    The Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) and the African Tax Administration Forum (ATAF) report, The Future of Resource Taxation: 10 policy ideas to mobilize mining revenues, reviews major problems faced by African and other governments trying to greatly increase revenue from mining.

    Great expectations, little taxation

    Colonial and neo-colonial mining arrangements have rarely delivered the revenue needed by post-colonial governments. Weak governance, overly generous tax incentives, poor fiscal policies, bad contracts, as well as tax avoidance and evasion have all eroded mineral revenues for developing countries.

    Resource-rich countries have been rethinking how to benefit more from mining in the face of the Covid-19 pandemic, worsening developing country debt crises, and increasingly uncertain government revenues and expenditures.

    Mining royalties and taxation have remained largely unchanged for decades, while corporate income tax is hard to collect, vulnerable to profit shifting and often minimized with the aid of tax professionals and corrupt officials.

    Improving taxation

    Taxing transnational corporations has long posed major challenges. Poor laws and enforcement as well as limited funding and staff mean most developing countries are poorly equipped to apply complex international tax norms, such as the ‘arm’s-length principle’ and ‘double taxation treaties’.

    Developing nations are especially vulnerable to tax base erosion and profit shifting (BEPS). International Monetary Fund staff estimate African countries have lost annual mining revenue up to $730 million annually due to BEPS.

    Many developing countries identified ‘transfer pricing’ as the greatest challenge to taxing mining. The problem has been made worse by mining tax regimes and investment agreements favouring investors, especially from abroad.

    Such agreements often contain fiscal incentives making mining revenue collection difficult. Worse, many governments believe generous tax incentives are necessary to attract mining investment. But these typically undermine effective tax administration, causing significant revenue losses.

    Also, policy conditionalities typically ‘lock in’ poorly designed fiscal conditions and mining contracts, often required or recommended by the IMF or World Bank. These tend to benefit investors, potentially resulting in costly disputes for host governments.

    Generating substantial government revenue from artisanal and small-scale mining (ASM) is difficult. As ASM induces more local spending, rather than extraction or export taxes, indirect taxes and wealth taxes are probably better for such incomes.

    Governments of resource-rich developing countries require finance and reliable personnel for successful implementation, to ensure accountability and curb corruption. Sufficient financial and technical assistance can greatly improve mining revenue collection, ensuring companies pay all royalties and taxes due.

    Effective implementation needs to be well supported by international agreements and organizations, development partners, and civil society. Tax incentives undermining government policy objectives and legal systems should be avoided.

    Taxing better not easy

    More access to information and expertise can greatly improve mining tax administration. Information, particularly from other jurisdictions, is critical for tax administrations to better collect taxes due. Sadly, progress has been painfully slow in many developing countries.

    Instruments designed to improve information exchange include bilateral investment and tax treaties, tax information exchange agreements, the Organization for Economic Co-operation and Development (OECD) Convention on Mutual Administrative Assistance in Tax Matters, and the ATAF Multilateral Agreement on Assistance in Tax Matters.

    Mining revenue collection needs to be able to verify the quantity and quality of mineral reserves and extracts. Key challenges include enhancing tax audit capacity and getting up-to-date knowledge of mining, including implications of changes in mining techniques.

    Better inter-agency cooperation is often necessary for better regulation and to avoid an incoherent, fragmented approach. Many mining revenue BEPS problems are due to capacity constraints, e.g., whether governments can effectively verify the costs of goods and services and mineral prices.

    Many transactions also require tax auditors to have detailed knowledge of the mining value chain. Many aspects of mining operations allow inflating actual costs to evade taxes. Valuing intangibles, such as intellectual property, is also difficult. Many countries also lack regulations to tax the sale of offshore indirect mining assets, often losing much revenue as a consequence.

    Too little too late?

    Mineral-rich developing countries hope for more ‘resource rents’ from mining to significantly enhance government revenue. They hope mining taxation will collect much more revenue, subject to other policy goals. However, in most cases, mining has failed to deliver the expected revenues.

    Inappropriate laws and investment agreements, overly generous tax incentives, as well as tax evasion and avoidance have contributed to this failure. Some authorities lack the expertise, information and means to more effectively tax mining. Corruption and poor revenue management also remain challenges.

    Thankfully, mining revenue collection has improved, albeit modestly. Many countries are improving their mining tax regulations and strengthening their tax audit capacity.

    Better international cooperation can address many problems, including information asymmetries. All countries implementing the Extractives Industries Transparency Initiative (EITI) are now required to disclose mining, oil, and gas contracts. This can significantly improve transparency.

    Although welcome, such improvements are still far from enough to meet the considerable domestic revenue mobilization needs of developing countries soon enough to adequately accelerate sustainable development after dismal progress for almost a decade.

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  • Exchange Rate Movements Due to Interest Rates, Speculation, Not Fundamentals

    Exchange Rate Movements Due to Interest Rates, Speculation, Not Fundamentals

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    • Opinion by Jomo Kwame Sundaram (kuala lumpur, malaysia)
    • Inter Press Service

    KUALA LUMPUR, Malaysia, Jul 26 (IPS) – Currency values and foreign exchange rates change for many reasons, largely following market perceptions, regardless of fundamentals. Market speculation has worsened volatility, instability and fragility in most economies, especially of small, open, developing countries.

    US Fed pushing up interest rates
    For no analytical rhyme or reason, US Federal Reserve Bank (Fed) chairman Jerome Powell insists on raising interest rates until inflation is brought under 2% yearly. Obliged to follow the US Fed, most central banks have raised interest rates, especially since early 2022.

    Jomo Kwame SundaramThe US dollar or greenback’s strengthening has been largely due to aggressive Fed interest rate hikes. Undoubtedly, inflation has been rising, especially since last year. But there are different types of inflation, with different implications, which should be differentiated by nature and cause.

    Typically, inflationary episodes are due to either demand pull or supply push. With rentier behaviour better recognized, there is now more attention to asset price and profit-driven inflation, e.g., ‘sellers inflation’ due to price-fixing in monopolistic and oligopolistic conditions.

    Recent international price increases are widely seen as due to new Cold War measures since Obama, Trump presidency initiatives, COVID-19 pandemic responses, as well as Ukraine War economic sanctions.

    These are all supply-side constraints, rather than demand-side or other causes of inflation.

    The Fed chair’s pretext for raising interest rates is to get inflation down to 2%. But bringing inflation under 2% – the fetishized, but nonetheless arbitrary Fed and almost universal central bank inflation target – only reduces demand, without addressing supply-side inflation.

    But there is no analytical – theoretical or empirical – justification for this completely arbitrary 2% inflation limit fetish. Thus, raising interest rates to address supply-side inflation is akin to prescribing and taking the wrong medicine for an ailment.

    Fed driving world to stagnation
    Thus, raising interest rates to suppress demand cannot be expected to address such supply-side driven inflation. Instead, tighter credit is likely to further depress economic growth and employment, worsening living conditions.

    Increasing interest rates is expected to reduce expenditure for consumption or investment. Thus, raising the costs of funds is supposed to reduce demand as well as ensuing price increases.

    Earlier research – e.g., by then World Bank chief economist Michael Bruno, with William Easterly, and by Stan Fischer and Rudiger Dornbusch of the Massachusetts Institute of Technology – found even low double-digit inflation to be growth-enhancing.

    The Milton Friedman-inspired notion of a ‘non-accelerating inflation rate of unemployment’ (NAIRU) also implies Fed interest rate hikes inappropriate and unnecessarily contractionary when inflation is not accelerating. US consumer price increases have decelerated since mid-2022, meaning inflation has not been accelerating for over a year.

    At least two conservative monetary economists with Nobel laureates have reminded the world how such Fed interventions triggered US contractions, abruptly ending economic recoveries. Although not discussed by them, the same Fed interventions also triggered international recessions.

    Friedman showed how the Fed ended the US recovery from 1937 at the start of Franklin Delano Roosevelt’s second presidential term. Recent US Fed chair Ben Bernanke and his colleagues also showed how similar Fed policies caused stagflation after the 1970s’ oil price hikes.

    De-dollarization?
    However, the US dollar has not been strengthening much in recent months. The greenback has been slipping since mid-2023 despite continuing Fed interest rate hikes a full year after consumer price increases stopped accelerating in mid-2022.

    Many blame recent greenback depreciation on ‘de-dollarization’, ironically accelerated by US sanctions against its rivals. Such illegal sanctions have disrupted financial payments, investment flows, dispute settlement mechanisms and other longstanding economic processes and arrangements authorized by the World Trade Organization, International Monetary Fund and UN charters.

    Even the ‘rule of law’ – long favouring the US, other rich countries and transnational corporate interests – has been ‘suspended’ for ‘reasons of state’ due to economic warfare which continues to escalate. Unilateral asset and technology expropriation has been justified as necessary to ‘de-risk’ for ‘national security’ and other such considerations.

    Horns of currency dilemma
    For many monetary authorities, the choice is between a weak currency and higher interest rates. With growing financialization over recent decades, big finance has become much more influential, typically demanding higher interest income and stronger currencies.

    Central bank independence – from the political executive and legislative processes – has enabled financial lobbies to influence policymaking even more. For example, Malaysia’s household debt share of national output rose from 47% in 2000 to over four-fifths before the COVID-19 pandemic, and 81% in 2022.

    There is little reason to believe recent exchange rates have been due to ‘economic fundamentals’. Currencies of countries with persistent trade and current account deficits have strengthened, while others with sustained surpluses have declined. Instead, relative interest rate changes recently appear to explain more.

    Thus, both the Japanese yen and Chinese renminbi depreciated by at least six per cent against the US dollar, at least before its recent tumble. By contrast, British pound sterling has appreciated against the greenback despite the dismal state of its real economy.

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  • Rich Nations Doubly Responsible for Greenhouse Gas Emissions

    Rich Nations Doubly Responsible for Greenhouse Gas Emissions

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    • Opinion by Jomo Kwame Sundaram, Hezri A Adnan (kuala lumpur, malaysia)
    • Inter Press Service

    KUALA LUMPUR, Malaysia, Dec 06 (IPS) – Natural flows do not respect national boundaries. The atmosphere and oceans cross international borders with little difficulty, as greenhouse gases (GHGs) and other fluids, including pollutants, easily traverse frontiers.

    Yet, in multilateral fora, strategies to address climate change and its effects remain largely national. GHG emissions – typically measured as carbon dioxide equivalents – are the main bases for assessing national climate action commitments.

    Hezri A AdnanAssessing national responsibility
    Jayati Ghosh, Shouvik Chakraborty and Debamanyu Das have critically considered how national climate responsibilities are assessed. The standard method – used by the UN Framework Convention on Climate Change (UNFCCC) – measures GHG emissions by activities within national boundaries.

    This approach attributes GHG emissions to the country where goods are produced. Such carbon accounting focuses blame for global warming on newly industrializing economies. But it ignores who consumes the goods and where, besides diverting attention from those most responsible for historical emissions.

    Thus, attention has focused on big national emitters. China, India, Brazil, Russia, South Africa and other large developing economies – especially the ‘late industrializers’ – have become the new climate villains.

    China, the United States and India are now the world’s three largest GHG emitters in absolute terms, accounting for over half the total. With more rapid growth in recent decades, China and India have greatly increased emissions.

    Undoubtedly, some developing countries have seen rapid GHG emission increases, especially during high growth episodes. In the first two decades of this century, such emissions rose over 3-fold in China, 2.7 times in India, and 4.7-fold in Indonesia.

    Meanwhile, most rich economies have seen smaller increases, even declines in emissions, as they ‘outsource’ labour- and energy-intensive activities to the global South. Thus, over the same period, production emissions fell by 12% in the US and Japan, and by nearly 22% in Germany.

    Jomo Kwame SundaramObscuring inequalities
    Only comparing total national emissions is not just one-sided, but also misleading, as countries have very different populations, economic outputs and structures.

    But determining responsibility for global warming fairly is necessary to ensure equitable burden sharing for adequate climate action. Most climate change negotiations and discussions typically refer to aggregate national emissions and income measures, rather than per capita levels.

    But such framing obscures the underlying inequalities involved. A per capita view comparing average GHG emissions offers a more nuanced, albeit understated perspective on the global disparities involved.

    Thus, in spite of recent reductions, rich economies are still the greatest GHG emitters per capita. The US and Australia spew eight times more per head than developing countries like India, Indonesia and Brazil.

    Despite its recent emission increases, even China emits less than half US per capita levels. Meanwhile, its annual emissions growth fell from 9.3% in 2002 to 0.6% in 2012. Even The Economist acknowledged China’s per capita emissions in 2019 were comparable to industrializing Western nations in 1885!

    Several developments have contributed to recent reductions in rich nations’ emissions. Richer countries can better afford ‘climate-friendly’ improvements, by switching energy sources away from the most harmful fossil fuels to less GHG-emitting options such as natural gas, nuclear and renewables.

    Changes in international trade and investment with ‘globalization’ have seen many rich countries shift GHG-intensive production to developing countries.

    Thus, rich economies have ‘exported’ production of – and responsibility for – GHG emissions for what they consume. Instead, developed countries make more from ‘high value’ services, many related to finance, requiring far less energy.

    Export emissions, shift blame
    Thus, rich countries have effectively adopted then World Bank chief economist Larry Summers’ proposal to export toxic waste to the poorest countries where the ‘opportunity cost’ of human life was presumed to be lowest!

    His original proposal has since become a development strategy for the age of globalization! Thus, polluting industries – including GHG-emitting production processes – have been relocated – together with labour-intensive industries – to the global South.

    Although kept out of the final published version of the Intergovernmental Panel on Climate Change (IPCC) report, over 40% of developing country GHG emissions were due to export production for developed countries.

    Such ‘emission exports’ by rich OECD (Organization for Economic Co-operation and Development) countries increased rapidly from 2002, after China joined the World Trade Organization (WTO). These peaked at 2,278 million metric tonnes in 2006, i.e., 17% of emissions from production, before falling to 1,577 million metric tonnes.

    For the OECD, the ‘carbon balance’ is determined by deducting the carbon dioxide equivalent of GHG emissions for imports from those for production, including exports. Annual growth of GHG discharges from making exports was 4.3% faster than for all production emissions.

    Thus, the US had eight times more per capita GHG production emissions than India’s in 2019. US per capita emissions were more than thrice China’s, although the world’s most populous country still emits more than any other nation.

    With high GHG-emitting products increasingly made in developing countries, rich countries have effectively ‘exported’ their emissions. Consuming such imports, rich economies are still responsible for related GHG emissions.

    Change is in the air
    Industries emitting carbon have been ‘exported’ – relocated abroad – for their products to be imported for consumption. But the UNFCCC approach to assigning GHG emissions responsibility focuses only on production, ignoring consumption of such imports.

    Thus, if responsibility for GHG emissions is also due to consumption, per capita differences between the global North and South are even greater.

    In contrast, the OECD wants to distribute international corporate income tax revenue according to consumption, not production. Thus, contradictory criteria are used, as convenient, to favour rich economies, shaping both tax and climate discourses and rules.

    While domestic investments in China have become much ‘greener’, foreign direct investment by companies from there are developing coal mines and coal-fired powerplants abroad, e.g., in Indonesia and Vietnam.

    If not checked, such FDI will put other developing countries on the worst fossil fuel energy pathway, historically emulating the rich economies of the global North. A Global Green New Deal would instead enable a ‘big push’ to ‘front-load’ investments in renewable energy.

    This should enable adequate financing of much more equitable development while ensuring sustainability. Such an approach would not only address national-level inequalities, but also international disparities.

    China now produces over 70% of photovoltaic solar panels annually, but is effectively blocked from exporting them abroad. In a more cooperative world, developing countries’ lower-cost – more affordable – production of the means to generate renewable energy would be encouraged.

    Instead, higher energy costs now – due to supply disruptions following the Ukraine war and Western sanctions – are being used by rich countries to retreat further from their inadequate, modest commitments to decelerate global warming.

    This retreat is putting the world at greater risk. Already, the international community is being urged to abandon the maximum allowable temperature increase above pre-industrial levels, thus further extending and deepening already unjust North-South relations.

    But change is in the air. Investing in and subsidizing renewable energy technologies in developing countries wanting to electrify, can enable them to develop while mitigating global warming.

    Hezri A Adnan is adjunct professor at the Faculty of Sciences, University of Malaya, Kuala Lumpur.

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  • AGRA Gets Make-Up, Not Make-Over

    AGRA Gets Make-Up, Not Make-Over

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    • Opinion by Jomo Kwame Sundaram, Timothy A. Wise (boston and kuala lumpur)
    • Inter Press Service

    BOSTON and KUALA LUMPUR, Nov 29 (IPS) – Despite its dismal record, the Gates Foundation-sponsored Alliance for a Green Revolution in Africa (AGRA) announced a new five-year strategy in September after rebranding itself by dropping ‘Green Revolution’ from its name.

    Rebranding, not reform
    Instead of learning from experience and changing its approach accordingly, AGRA’s new strategy promises more of the same. Ignoring evidence, criticisms and civil society pleas and demands, the Gates Foundation has committed another $200 million to its new five-year plan, bringing its total contribution to around $900 million.

    Timothy A. WiseMore than two-thirds of AGRA’s funding has come from Gates, with African governments providing much more – as much as a billion dollars yearly – in subsidies for Green Revolution seeds and fertilizers.

    Stung by criticism of its poor results, AGRA delayed announcing its new strategy by a year, while its chief executive shepherded the controversial UN Food Systems Summit of 2021. Following this, AGRA has been using more UN Sustainable Development Goals rhetoric.

    Hence, AGRA’s new slogan – ‘Sustainably Growing Africa’s Food Systems’. Likewise, the new plan claims to “lay the foundation for a sustainable food systems-led inclusive agricultural transformation”. But beyond such lip service, there is little evidence of any meaningful commitment to sustainable agriculture in the $550 million plan for 2023–27.

    Despite heavy government subsidies, AGRA promotion of commercial seeds and fertilizers for just a few cereal crops failed to significantly increase productivity, incomes or even food security. But instead of addressing past shortcomings, the new plan still relies heavily on more of the same despite its failure to “catalyze” a productivity revolution among African farmers.

    Jomo Kwame SundaramThe supposedly new strategy dashes any hopes that AGRA or the Gates Foundation would acknowledge the harmful social and environmental effects of Green Revolutions in India, Africa and elsewhere. AGRA offered no explanation for why it dropped ‘Green Revolution’ from its name.

    The name change suggests the 16-year-old AGRA wants to dissociate itself from past failures, but without acknowledging its own flawed approach. Recently, much higher fertilizer prices – following sanctions against Russia and Belarus after the Ukraine invasion – have worsened the lot of farmers relying on AGRA recommended inputs.

    It is time to change course, with policies promoting ecological farming by reducing reliance on synthetic fertilizers as appropriate. But despite its new slogan, AGRA’s new strategy intends otherwise.

    Last month, the Alliance for Food Sovereignty in Africa rejected the strategy and name change as “cosmetic”, “an admission of failure” of the Green Revolution project, and “a cynical distraction” from the urgent need to change course.

    Productivity gains and losses
    Despite spending well over a billion dollars, AGRA’s productivity gains have been modest, and only for a few more heavily subsidized crops such as maize and rice. And from 2015 to 2020, cereal yields have not risen at all.

    Meanwhile, traditional food crop production has declined under AGRA, with millet falling over a fifth. Yields actually also fell for cassava, groundnuts and root crops such as sweet potato. Across a basket of staple crops, yields rose only 18% in 12 years.

    Farmer incomes have not risen, especially after increased production costs are taken into account. As for halving hunger, which Gates and AGRA originally promised, the number of ‘severely undernourished’ people in AGRA’s 13 focus countries increased by 31%!

    A donor-commissioned evaluation confirmed many adverse farmer outcomes. It found the minority of farmers who benefited were mainly better-off men, not smallholder women the programme was ostensibly meant for.

    That did not deter the Gates Foundation from committing more to AGRA despite its dismal track record, failed strategy, and poor monitoring to track progress. Judging by the new five-year plan, we can expect even less accountability.

    The new plan does not even set measurable goals for yields, incomes or food security. As the saying goes, what you don’t measure you don’t value. Apparently, AGRA does not value agricultural productivity, even though it is still at the core of the organization’s strategy.

    Last month, the Rockefeller Foundation, AGRA’s other founding donor and a leader of the first Green Revolution from the 1950s, announced a reduction in its grant to AGRA and a decisive step back from the Green Revolution approach.

    Its grant to AGRA supports school feeding initiatives and “alternatives to fossil-fuel derived fertilisers and pesticides through the promotion of regenerative agricultural practices such as cultivation of nitrogen-fixing beans”.

    Business in charge
    AGRA’s new strategy is built on a series of “business lines”, e.g., the “sustainable farming business line” will coordinate with the “Seed Systems business line” to sell inputs. Private Village Based Advisors are meant to provide training and planting advice in this privatized, commercial reincarnation of the government or quasi-government extension services of an earlier era.

    The UN Food and Agriculture Organization successfully promoted peer-learning of agro-ecological practices via Farmer Field Schools after successfully field-testing them. This came about after research showed ‘brown hoppers’ thrived in Asian rice farms after Green Revolution pesticides eliminated the insect’s natural predators.

    China lost a fifth of its 2007-08 paddy harvest to the pest, triggering a price spike in the thinly traded world rice market. Seeking help from the International Rice Research Institute, located in the Philippines, a Chinese delegation found its Entomology Department had lost most of its former capacity due to under-funding.

    Earlier international agricultural research collaboration associated with the first Green Revolution – especially in wheat, maize and rice – seems to have collapsed, surrendering to corporate and philanthropic interests. This bitter experience encouraged China to step up its agronomic research efforts with a greater agro-ecological emphasis.

    Empty promises?
    The new strategy promises “AGRA will promote increased crop diversification at the farm level”. But its advisers cum salespeople have a vested interest in selling their wares, rather than good local seeds which do not require repeat purchases every planting season.

    AGRA is not strengthening resilience by promoting agroecology or reducing farmer reliance on costly inputs such as fossil fuel fertilizers and other, often toxic, agrochemicals. Despite many proven African agroecological initiatives, support for them remains modest.

    The new strategy stresses irrigation, key to most other Green Revolutions, but conspicuously absent from Africa’s Green Revolution. But the plan is deafeningly silent on how fiscally strapped governments are to provide such crucial infrastructure, especially in the face of growing water, fiscal and debt stress, worsened by global warming.

    It is often said stupidity is doing the same thing over and over again, expecting different results. Perhaps this is due to the technophile conceit that some favoured innovation is superior to everything else, including scientific knowledge, processes and agro-ecological solutions.

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  • Open Veins of Africa Bleeding Heavily

    Open Veins of Africa Bleeding Heavily

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    • Opinion by Jomo Kwame Sundaram, Ndongo Samba Sylla (dakar and kuala lumpur)
    • Inter Press Service

    DAKAR and KUALA LUMPUR, Nov 22 (IPS) – The ongoing plunder of Africa’s natural resources drained by capital flight is holding it back yet again. More African nations face protracted recessions amid mounting debt distress, rubbing salt into deep wounds from the past.

    With much less foreign exchange, tax revenue, and policy space to face external shocks, many African governments believe they have little choice but to spend less, or borrow more in foreign currencies.

    Ndongo Samba Sylla

    Most Africans are struggling to cope with food and energy crises, inflation, higher interest rates, adverse climate events, less health and social provisioning. Unrest is mounting due to deteriorating conditions despite some commodity price increases.

    Economic haemorrhage

    After ‘lost decades’ from the late 1970s, Africa became one of the world’s fastest growing regions early in the 21st century. Debt relief, a commodity boom and other factors seemed to support the deceptive ‘Africa rising’ narrative.

    But instead of long overdue economic transformation, Africa has seen jobless growth, rising economic inequalities and more resource transfers abroad. Capital flight – involving looted resources laundered via foreign banks – has been bleeding the continent.

    According to the High Level Panel on Illicit Financial Flows from Africa, the continent was losing over $50 billion annually. This was mainly due to ‘trade mis-invoicing’ – under-invoicing exports and over-invoicing imports – and fraudulent commercial arrangements.

    Transnational corporations (TNCs) and criminal networks account for much of this African economic surplus drain. Resource-rich countries are more vulnerable to plunder, especially where capital accounts have been liberalized.

    Jomo Kwame Sundaram

    Externally imposed structural adjustment programs (SAPs), after the early 1980s’ sovereign debt crises, have forced African economies to be even more open – at great economic cost. SAPs have made them more (food) import-dependent while increasing their vulnerability to commodity price shocks and global liquidity flows.

    Leonce Ndikumana and his colleagues estimate over 55% of capital flight – defined as illegally acquired or transferred assets – from Africa is from oil-rich nations, with Nigeria alone losing $467 billion during 1970-2018.

    Over the same period, Angola lost $103 billion. Its poverty rate rose from 34% to 52% over the past decade, as the poor more than doubled from 7.5 to 16 million.

    Oil proceeds have been embezzled by TNCs and Angola’s elite. Abusing her influence, the former president’s daughter, Isabel dos Santos acquired massive wealth. A report found over 400 companies in her business empire, including many in tax havens.

    From 1970 to 2018, Côte d’Ivoire lost $55 billion to capital flight. Growing 40% of the world’s cocoa, it gets only 5–7% of global cocoa profits, with farmers getting little. Most cocoa income goes to TNCs, politicians and their collaborators.

    Mining giant South Africa (SA) has lost $329 billion to capital flight over the last five decades. Mis-invoicing, other modes of embezzling public resources, and tax evasion augment private wealth hidden in offshore financial centres and tax havens.

    Fiscal austerity has slowed job growth and poverty reduction in ‘the most unequal country in the world’. In SA, the richest 10% own over half the nation’s wealth, while the poorest 10% have under 1%!

    Resource theft and debt

    With this pattern of plunder, resource-rich African countries – that could have accelerated development during the commodity boom – now face debt distress, depreciating currencies and imported inflation, as interest rates are pushed up.

    Zambia’s default on its foreign debt obligations in late 2020 has made headlines. But foreign capture of most Zambian copper export proceeds is not acknowledged.

    During 2000-2020, total foreign direct investment income from Zambia was twice total debt servicing for external government and government-guaranteed loans. In 2021, the deficit in the ‘primary income’ account (mainly returns to capital) of Zambia’s balance of payments was 12.5% of GDP.

    As interest payments on public external debt came to ‘only’ 3.5% of GDP, most of this deficit (9% of GDP) was due to profit and dividend remittances, as well as interest payments on private external debt.

    For the IMF, World Bank and ‘creditor nations’, debt ‘restructuring’ is conditional on continuing such plunder! African countries’ worsening foreign indebtedness is partly due to lack of control over export earnings controlled by TNCs, with African elite support.

    Resource pillage, involving capital flight, inevitably leads to external debt distress. Invariably, the IMF demands government austerity and opening African economies to TNC interests. Thus, we come full circle, and indeed, it is vicious!

    Africa’s wealth plunder dates back to colonial times, and even before, with the Atlantic trade of enslaved Africans. Now, this is enabled by transnational interests crafting international rules, loopholes and all.

    Such enablers include various bankers, accountants, lawyers, investment managers, auditors and other wheeler dealers. Thus, the origins of the wealth of ‘high net-worth individuals’, corporations and politicians are disguised, and its transfer abroad ‘laundered’.

    What can be done?

    Capital flight is not mainly due to ‘normal’ portfolio choices by African investors. Hence, raising returns to investment, e.g., with higher interest rates, is unlikely to stem it. Worse, such policy measures discourage needed domestic investments.

    Besides enforcing efficient capital controls, strengthening the capabilities of specialized national agencies – such as customs, financial supervision and anti-corruption bodies – is important.

    African governments need stronger rules, legal frameworks and institutions to curb corruption and ensure more effective natural resource management, e.g., by revising bilateral investment treaties and investment codes, besides renegotiating oil, gas, mining and infrastructure contracts.

    Records of all investments in extractive industries, tax payments by all involved, and public prosecution should be open, transparent and accountable. Punishment of economic crimes should be strictly enforced with deterrent penalties.

    The broader public – especially civil society organizations, local authorities and impacted communities – must also know who and what are involved in extractive industries.

    Only an informed public who knows how much is extracted and exported, by whom, what revenue governments get, and their social and environmental effects, can keep corporations and governments in check.

    Improving international trade and finance transparency is essential. This requires ending banking secrecy and better regulation of TNCs to curb trade mis-invoicing and transfer pricing, still enabling resource theft and pillage.

    OECD rhetoric has long blamed capital flight on offshore tax havens on remote tropical islands. But those in rich countries – such as the UK, US, Switzerland, Netherlands, Singapore and others – are the biggest culprits.

    Stopping haemorrhage of African resource plunder by denying refuge for illicit transfers should be a rich country obligation. Automatic exchange of tax-related information should become truly universal to stop trade mis-invoicing, transfer pricing abuses and hiding stolen wealth abroad.

    Unitary taxation of transnational corporations can help end tax abuses, including evasion and avoidance. But the OECD’s Inclusive Framework proposals favour their own governments and corporate interests.

    Africa is not inherently ‘poor’. Rather, it has been impoverished by fraud and pillage leading to resource transfers abroad. An earnest effort to end this requires recognizing all responsibilities and culpabilities, national and international.

    Africa’s veins have been slit open. The centuries-long bleeding must stop.

    Dr Ndongo Samba Sylla is a Senegalese development economist working at the Rosa Luxemburg Foundation in Dakar. He authored The Fair Trade Scandal. Marketing Poverty to Benefit the Rich and co-authored Africa’s Last Colonial Currency: The CFA Franc Story. He also edited Economic and Monetary Sovereignty for 21st century Africa, Revolutionary Movements in Africa and Imperialism and the Political Economy of Global South’s Debt. He tweets at @nssylla

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  • Developing Countries Need Monetary Financing

    Developing Countries Need Monetary Financing

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

    SYDNEY and DAKAR, Nov 01 (IPS) – Developing countries have long been told to avoid borrowing from central banks (CBs) to finance government spending. Many have even legislated against CB financing of fiscal expenditure.

    Central bank fiscal financing
    Such laws are supposedly needed to curb inflation – below 5%, if not 2% – to accelerate growth. These arrangements have also constrained a potential CB developmental role and government ability to respond better to crises.

    Anis ChowdhuryImproved monetary-fiscal policy coordination is also needed to achieve desired structural transformation, especially in decarbonizing economies. But too many developing countries have tied their own hands with restrictive legislation.

    A few have pragmatically suspended or otherwise circumvented such self-imposed prohibitions. This allowed them to borrow from CBs to finance pandemic relief and recovery packages.

    Such recent changes have re-opened debates over the urgent need for counter-cyclical and developmental fiscal-monetary policy coordination.

    Monetary financing rubbished
    But financial interests claim this enables national CBs to finance government deficits, i.e., monetary financing (MF). MF is often blamed for enabling public debt, balance of payments deficits, and runaway inflation.

    As William Easterly noted, “Fiscal deficits received much of the blame for the assorted economic ills that beset developing countries in the 1980s: over indebtedness and the debt crisis, high inflation, and poor investment performance and growth”.

    Hence, calls for MF are typically met with scepticism, if not outright opposition. MF undermines central bank independence (CBI) – hence, the strict segregation of monetary from fiscal authorities – supposedly needed to prevent runaway inflation.

    Jomo Kwame SundaramRecent International Monetary Fund (IMF) research insists MF “involves considerable risks”. But it acknowledges MF to cope with the pandemic did not jeopardize price stability. A Bank of International Settlements paper also found MF enabled developing countries to respond countercyclically to the pandemic.

    Cases of MF leading to runaway inflation have been very exceptional, e.g., Bolivia in the 1980s or Zimbabwe in 2007-08. These were often associated with the breakdown of political and economic systems, as when the Soviet Union collapsed.

    Bolivia suffered major external shocks. These included Volcker’s interest rate spikes in the early 1980s, much reduced access to international capital markets, and commodity price collapses. Political and economic conflicts in Bolivian society hardly helped.

    Similarly, Zimbabwe’s hyperinflation was partly due to conflicts over land rights, worsened by government mismanagement of the economy and British-led Western efforts to undermine the Mugabe government.

    Indian lessons
    Former Reserve Bank of India Governor Y.V. Reddy noted fiscal-monetary coordination had “provided funds for development of industry, agriculture, housing, etc. through development financial institutions” besides enabling borrowing by state owned enterprises (SOEs) in the early decades.

    For him, less satisfactory outcomes – e.g., continued “macro imbalances” and “automatic monetization of deficits” – were not due to “fiscal activism per se but the soft-budget constraint” of SOEs, and “persistent inadequate returns” on public investments.

    Monetary policy is constrained by large and persistent fiscal deficits. For Reddy, “undoubtedly the nature of interaction between depends on country-specific situation”.

    Reddy urged addressing monetary-fiscal policy coordination issues within a broad common macroeconomic framework. Several lessons can be drawn from Indian experience.

    First, “there is no ideal level of fiscal deficit, and critical factors are: How is it financed and what is it used for?” There is no alternative to SOE efficiency and public investment project financial viability.

    Second, “the management of public debt, in countries like India, plays a critical role in development of domestic financial markets and thus on conduct of monetary policy, especially for effective transmission”.

    Third, “harmonious implementation of policies may require that one policy is not unduly burdening the other for too long”.

    Lessons from China?Zhou Xiaochuan, then People’s Bank of China (PBoC) Governor, emphasized CBs’ multiple responsibilities – including financial sector development and stability – in transition and developing economies.

    China’s CB head noted, “monetary policy will undoubtedly be affected by balance of international payments and capital flows”. Hence, “macro-prudential and financial regulation are sensitive mandates” for CBs.

    PBoC objectives – long mandated by the Chinese government – include maintaining price stability, boosting economic growth, promoting employment, and addressing balance of payments problems.

    Multiple objectives have required more coordination and joint efforts with other government agencies and regulators. Therefore, “the PBoC … works closely with other government agencies”.

    Zhou acknowledged, “striking the right balance between multiple objectives and the effectiveness of monetary policy is tricky”. By maintaining close ties with the government, the PBoC has facilitated needed reforms.

    He also emphasized the need for policy flexibility as appropriate. “If the central bank only emphasized keeping inflation low and did not tolerate price changes during price reforms, it could have blocked the overall reform and transition”.

    During the pandemic, the PBoC developed “structural monetary” policy tools, targeted to help Covid-hit sectors. Structural tools helped keep inter-bank liquidity ample, and supportive of credit growth.

    More importantly, its targeted monetary policy tools were increasingly aligned with the government’s long-term strategic goals. These include supporting desired investments, e.g., in renewable energy, while preventing asset price bubbles and ‘overheating’.

    In other words, the PBoC coordinates monetary policy with fiscal and industrial policies to achieve desired stable growth, thus boosting market confidence. As a result, inflation in China has remained subdued.

    Consumer price inflation has averaged only 2.3% over the past 20 years, according to The Economist. Unlike global trends, China’s consumer price inflation fell to 2.5% in August, and rose to only 2.8% in September, despite its ‘zero-Covid’ policy and measures such as lockdowns.

    Needed reforms
    Effective fiscal-monetary policy coordination needs appropriate arrangements. An IMF working paper showed, “neither legal independence of central bank nor a balanced budget clause or a rule-based monetary policy framework … are enough to ensure effective monetary and fiscal policy coordination”.

    Appropriate institutional and operational arrangements will depend on country-specific circumstances, e.g., level of development and depth of the financial sector, as noted by both Reddy and Zhou.

    When the financial sector is shallow and countries need dynamic structural transformation, setting up independent fiscal and monetary authorities is likely to hinder, not improve stability and sustainable development.

    Understanding each other’s objectives and operational procedures is crucial for setting up effective coordination mechanisms – at both policy formulation and implementation levels. Such an approach should better achieve the coordination and complementarity needed to mutually reinforce fiscal and monetary policies.

    Coherent macroeconomic policies must support needed structural transformation. Without effective coordination between macroeconomic policies and sectoral strategies, MF may worsen payments imbalances and inflation. Macro-prudential regulations should also avoid adverse MF impacts on exchange rates and capital flows.

    Poorly accountable governments often take advantage of real, exaggerated and imagined crises to pursue macroeconomic policies for regime survival, and to benefit cronies and financial supporters.

    Undoubtedly, much better governance, transparency and accountability are needed to minimize both immediate and longer-term harm due to ‘leakages’ and abuses associated with increased government borrowing and spending.

    Citizens and their political representatives must develop more effective means for ‘disciplining’ policy making and implementation. This is needed to ensure public support to create fiscal space for responsible counter-cyclical and development spending.

    IPS UN Bureau


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  • Macroeconomic Policy Coordination More One-Sided, Ineffective

    Macroeconomic Policy Coordination More One-Sided, Ineffective

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

    SYDNEY and KUALA LUMPUR, Oct 25 (IPS) – Widespread adverse reactions to the UK government’s recent ‘mini-budget’ forced new Prime Minister Liz Truss to resign. The episode highlighted problems of macroeconomic policy coordination and the interests involved.

    Macro-policy coordination
    But macroeconomic, specifically fiscal-monetary policy coordination almost became “taboo” as central bank independence (CBI) became the new orthodoxy. It has been accused of enabling CBs to finance government deficits. Critics claim inflation, even hyperinflation, becomes inevitable.

    Anis ChowdhuryGovernment finance ministries and CBs are the two main macroeconomic policy protagonists. Poor ‘macro-policy’ coordination has generated problems, including contradictory policy responses. This has meant more macroeconomic and financial instability, worrying markets and investors.

    Fiscal policy – notably variations in government tax and spending – mainly aims to influence long-term growth and distribution. CB monetary policy – e.g., variations in short-term interest rates and credit growth – claims to prioritize price and exchange rate stability.

    By the early 1990s, the ‘Washington consensus’ implied the two macro-policy actors should work independently due to their different time horizons. After all, governments are subject to short-term political considerations inimical to monetary stability needed for long-term growth.

    Claiming to be “technocratic”, CBs have increasingly set their own goals or targets. CBI has involved both ‘goal’ and ‘instrument’ independence, instead of ‘goal dependence’ with ‘instrument independence’.

    CBI was ostensibly to avoid ‘fiscal dominance’ of monetary policy. Meanwhile, government fiscal policy became subordinated to CB inflation targets. For former Reserve Bank of Australia Deputy Governor Guy Debelle, monetary policy became “the only game in town for demand management”.

    Debelle noted that except for rare and brief coordinated fiscal stimuli in early 2009, after the onset of the global financial crisis, “demand management continued to be the sole purview of central banks. Fiscal policy was not much in the mix”.

    Jomo Kwame SundaramSub-optimal outcomes
    But more than three decades of “divorce” between independent CBs and fiscal authorities have failed to deliver its promised benefits. Instead, monetary policy dominance has worsened financial instability.

    Adam Posen found the costs of disinflation, or keeping inflation low, higher in OECD countries with CBI. Carl Walsh found likewise in the European Community.

    For Guy Debelle and Stanley Fischer, CBs have sought to enhance their credibility by being tougher on inflation, even at the expense of output and employment losses.

    Committed to arbitrary targets, independent CBs have sought credit for keeping inflation low. They deny other contributory factors, e.g., labour’s diminished bargaining power and globalization, particularly cheaper supplies.

    John Taylor, author of the ‘Taylor rule’ CB mantra, concluded CB “performance was not associated with de jure central bank independence”. De jure CB independence has not prevented them from “deviating from policies that lead to both price and output stability”.

    The de facto independent US Fed has also taken “actions that have led to high unemployment and/or high inflation”. As single-minded independent CBs pursued low inflation, they neglected their responsibility for financial stability.

    CBs’ indiscriminate monetary expansion during the 2000s’ Great Moderation enabled asset price bubbles and dangerous speculation, culminating in the global financial crisis (GFC).

    Since the GFC, “the financial sector has become dependent on easy liquidity… To compensate for quantitative easing (QE)-induced low return…, increased the risk profile of their other assets, taking on more leverage, and hedging interest rate risk with derivatives”.

    Independent CBs also never acknowledge the adverse distributional consequences of their policies. This has been true of both conventional policies, involving interest rate adjustments, and unconventional ones, with bond buying, or QE. All have enabled speculation, credit provision and other financial investments.

    They have also helped inefficient and uncompetitive ‘zombie’ enterprises survive. Instead of reversing declining long-term productivity growth, the slowdown since the GFC “has been steep and prolonged”.

    Workers’ real wages have remained stagnant or even declined, lowering labour’s income share and widening income inequality. As crises hit and monetary policies were tightened, workers lost jobs and incomes. Workers are doubly hit as governments pursue fiscal austerity to keep inflation low.

    Dire consequences
    The pandemic has seen unprecedented fiscal and monetary responses. But there has been little coordination between fiscal and monetary authorities. Unsurprisingly, greater pandemic-induced fiscal deficits and monetary expansion have raised inflationary pressures, especially with supply disruptions.

    This could have been avoided if policymakers had better coordinated fiscal and monetary measures to unlock key supply bottlenecks. War and economic sanctions have made the supply situation even more dire.

    Government debt has been rising since the GFC, reaching record levels due to pandemic measures. CBs hiking interest rates to contain inflation have thus worsened public debt burdens, inviting austerity measures.

    Thus, countries go through cycles of debt accumulation and output contraction. Supposed to contain inflation, they adversely impact livelihoods. Many more developing countries face debt crises, further setting back progress.

    Needed reforms
    Sixty years ago, Milton Friedman asserted, “money is too important to be left to the central bankers”. He elaborated, “One economic defect of an independent central bank … is that it almost invariably involves dispersal of responsibility… Another defect … is the extent to which policy is … made highly dependent on personalities… third … defect is that an independent central bank will almost invariably give undue emphasis to the point of view of bankers”.

    Thus, government-sceptic Friedman recommended, “either to make the Federal Reserve a bureau in the Treasury under the secretary of the Treasury, or to put the Federal Reserve under direct congressional control.

    “Either involves terminating the so-called independence of the system… either would establish a strong incentive for the Fed to produce a stabler monetary environment than we have had”.

    Undoubtedly, this is an extreme solution. Friedman also suggested replacing CB discretion with monetary policy rules to resolve the problem of lack of coordination. But, as Alan Blinder has observed, such rules are “unlikely to score highly”.

    Effective fiscal-monetary policy coordination requires appropriate supporting institutions and operating arrangements. As IMF research has shown, “neither legal independence of central bank nor a balanced budget clause or a rule-based monetary policy framework … are enough to ensure effective monetary and fiscal policy coordination”.

    Although rules-based policies may enhance transparency and strengthen discipline, they cannot create “credibility”, which depends on policy content, not policy frameworks.

    For Debelle, a combination of “goal dependence” and “instrument or operational independence” of CBs under strong democratic or parliamentary oversight may be appropriate for developed countries.

    There is also a need to broaden membership of CB governing boards to avoid dominance by financial interests and to represent broader national interests.

    But macro-policy coordination should involve more than merely an appropriate fiscal-monetary policy mix. A more coherent approach should also incorporate sectoral strategies, e.g., public investment in renewable energy, education & training, healthcare. Such policy coordination should enable sustainable development and reverse declining productivity growth.

    As Buiter urges, it is up to governments “to make appropriate use of … fiscal space” created by fiscal-monetary coordination. Democratic checks and balances are needed to prevent “pork-barrelling” and other fiscal abuses and to protect fiscal decision-making from corruption.

    IPS UN Bureau


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  • Central Bank Myths Drag down World Economy

    Central Bank Myths Drag down World Economy

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

    SYDNEY and KUALA LUMPUR, Oct 10 (IPS) – The dogmatic obsession with and focus on fighting inflation in rich countries are pushing the world economy into recession, with many dire consequences, especially for poorer countries. This phobia is due to myths shared by most central bankers.

    Anis Chowdhury

    Myth 1: Inflation chokes growth

    The common narrative is that inflation hurts growth. Major central banks (CBs), the Bretton Woods institutions (BWIs) and the Bank of International Settlements (BIS) all insist inflation harms growth despite all evidence to the contrary. The myth is based on a few, very exceptional cases.

    “Once-in-a-generation inflation in the US and Europe could choke off global growth, with a global recession possible in 2023”, claimed the World Economic Forum Chief Economist’s Outlook under the headline, “Inflation Will Lead Inexorably To Recession”.

    The Atlantic recently warned, “Inflation Is Bad… raising the prospect of a period of economic stagnation or even a recession”. The Economist claims, “It hurts investment and makes most people poorer”.

    Jomo Kwame Sundaram

    Without evidence, the narrative claims causation runs from inflation to growth, with inevitable “adverse” consequences. But serious economists have found no conclusive supporting evidence.

    World Bank chief economist Michael Bruno and William Easterly asked, “Is inflation harmful to growth?” With data from 31 countries for 1961-94, they concluded, “The ratio of fervent beliefs to tangible evidence seems unusually high on this topic, despite extensive previous research”.

    OECD evidence for 1961-2021 – Figures 1a & 1b – updates Bruno & Easterly, again contradicting the ‘standard narrative’ of major CBs, BWIs, BIS and others. The inflation-growth relationship is strongly positive when 1974-75 – severe oil spike recession years – are excluded.

    The relationship does not become negative even when 1974-75 are included. Also, the “Great Inflation” of 1965-82 did not harm growth. Hence, there is no empirical basis for setting a particular threshold, such as the now standard 2% inflation target – long acknowledged as “plucked from the air”!

    Developing countries also have a positive inflation-growth relationship if extreme cases – e.g., inflation rates in excess of 20%, or ‘excessively’ impacted by commodity price volatilities, civil strife, war – are omitted (Figures 2a & 2b).

    Figure 2a summarizes evidence for 82 developing countries during 1991-2021. Although slightly weakened, the positive relationship remained, even if the 1981-90 debt crises years are included (Figure 2b).

    Myth 2: Inflation always accelerates

    Another popular myth is that once inflation begins, it has an inherent tendency to accelerate. As inflation supposedly tends to speed up, not acting decisively to nip it in the bud is deemed dangerous. So, the IMF chief economist advises, “Don’t let inflation ‘genie’ out of the bottle”. Hence, inflation has to be ‘nipped in the bud’.

    But, in fact, OECD inflation has never exceeded 16% in the past six decades, including the 1970s’ oil shock years. Inflation does not accelerate easily, even when labour has more bargaining power, or wages are indexed to consumer prices – as in some countries.

    Bruno & Easterly only found a high likelihood of inflation accelerating when inflation exceeded 40%. Two MIT economists – Rüdiger Dornbusch and Stanley Fischer, later International Monetary Fund Deputy Managing Director – came to a similar conclusion, describing 15–30% inflation as “moderate”.

    Dornbusch & Fischer also stressed, “Most episodes of moderate inflation were triggered by commodity price shocks and were brief; very few ended in higher inflation”. Importantly, they warned, “such inflations can be reduced only at a substantial … cost to growth”.

    Myth 3: Hyperinflation threatens

    Although extremely rare, avoiding hyperinflation has become the pretext for central bankers prioritizing inflation prevention. Hyperinflation – at rates over 50% for at least a month – is undoubtedly harmful for growth. But as IMF research shows, “Since 1947, hyperinflations in market economies have been rare”.

    Many of the worst hyperinflation episodes in history were after World War Two and the Soviet demise. Bruno & Easterly also mention breakdowns of economic and political systems – as in Iran or Nicaragua, following revolutions overthrowing corrupt despotic regimes.

    A White House staff blog noted, “The inflationary period after World War II is likely a better comparison for the current economic situation than the 1970s and suggests that inflation could quickly decline once supply chains are fully online and pent-up demand levels off”.

    Myth 4: Evidence-based policymaking

    Central bankers love to claim their policymaking is evidence-based. They cite one another and famous economists to enhance the aura of CB “credibility”.

    Unsurprisingly, the Reserve Bank of New Zealand promoted its arbitrary 2% inflation target mainly by endless repetition – not strong evidence or superior logic. They simply “devoted a huge amount of effort” to preaching the new mantra “to everybody who would listen – and some who were reluctant to listen”.

    The narrative also suited those concerned about wage pressures. Fighting inflation has provided an excuse to further weaken workers’ working conditions and pay. Thus, labour’s share of income has been declining since the 1970s.

    Greater central bank independence (from the executive) has enhanced the influence and power of financial interests – largely at the expense of the real economy. Output and employment growth weakened as a result, worsening the lot of the many, especially in the global South.

    Fact: Central banks induce recessions

    Inappropriate CB policies have often slowed economic growth without mitigating inflation. Hawkish CB responses to inflation can become self-fulfilling prophecies with high inflation seemingly associated with recessions or growth collapses.

    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”.

    Thus, central bank interventions have caused contractions without reducing inflation. The longest US recession after the Great Depression – in the early 1980s – was due to Fed chair Paul Volcker’s 1979-81 interest rate hikes.

    A New York Times opinion-editorial recently 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”.

    Fearing an “extremely severe” world recession, Columbia University history professor Adam Tooze has summed up the current CBs’ interest rate hike frenzy as “the single most dramatic simultaneous tightening of monetary policy ever”!

    Phobias, especially if based on unfounded beliefs, never offer good bases for sound policymaking.

    IPS UN Bureau


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  • Ideology and Dogma Ensure Policy Disaster

    Ideology and Dogma Ensure Policy Disaster

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

    SYDNEY and KUALA LUMPUR, Oct 04 (IPS) – Central banks (CBs) around the world – led by the US Fed, European Central Bank and Bank of England – are raising interest rates, ostensibly to check inflation. The ensuing race to the bottom is hastening world economic recession.

    Going for broke

    New UK Prime Minister Liz Truss has already revived ‘supply side economics’, long thought to have been fatally discredited. Her huge tax cuts are supposed to kick-start Britain’s stagnant economy in time for the next general election.

    Anis Chowdhury

    But studies of past tax cuts have not found any positive link between lower taxes and economic or employment growth. Oft-cited US examples of Reagan, Bush or Trump tax cuts have been shown to be little more than economic sophistry.

    Reagan’s Council of Economic Advisers chairman, Harvard professor Martin Feldstein found most Reagan era growth due to expansionary monetary policy. Volcker’s interest rate hikes to fight inflation were reversed. This enabled the US economy to bounce back from its severe 1982 monetary policy inflicted recession.

    George W Bush’s 2001 and 2003 tax cuts also failed to spur growth. Instead, deficits and debt ballooned. “The largest benefits from the Bush tax cuts flowed to high-income taxpayers”. Likewise, Trump tax cuts failed to lift the US economy, with billionaires now paying much less than workers.

    After Boris Johnson stepped down, UK Conservative Party leadership contenders started by promising more tax cuts. But The Economist was “sceptical that such cuts will lift Britain’s growth rate”. Instead, it worried tax cuts would compound inflationary pressures, triggering ever tighter monetary policy.

    The Economist concluded, “It is hard to spot a connection between the overall level of taxation and long-term prosperity”. Unsurprisingly, The Economist sees Truss’ “largest tax cuts in half a century” as “a reckless budget, fiscally and politically”.

    Jomo Kwame Sundaram

    While such tax cuts mainly benefit the very rich, the costs of such monetary and fiscal policies are borne by workers and other consumers. Workers are harshly punished by austerity measures, losing both jobs and incomes to interest rate hikes.

    Tax cuts usually make things worse. Typically, these require cutting social protection and essential public services, ostensibly to balance the budget. So, already greater wealth and income inequalities will worsen.

    Governments have to cut public investments due to ballooning budget deficits. Higher interest rates and public spending cuts will also derail efforts needed to transition to more sustainable, greener futures.

    Class war

    Policy fights over inflation have many dimensions, including class. Instead of helping people cope with rising living costs, increasing interest rates only makes things worse, hastening economic slowdowns. Thus, workers not only lose jobs and incomes, but also are forced to pay more for mortgages and other debts.

    Unemployment, lower incomes, deteriorating health and other pains hurt workers. As workers want higher incomes to cope with rising living expenses, such austere policies are deemed necessary to prevent ‘wage-price spirals’.

    As usual, workers are being blamed for the resurgence of inflation. But research by the International Monetary Fund (IMF) and others has found no evidence of such wage-price spirals in recent decades.

    Experience and evidence suggest very low likelihood of such dialectics in current circumstances, although some nominal wages have risen. Since the 1980s, labour bargaining power and collective wage determination have declined.

    Policymakers should address stagnant, even declining real wages in most economies in recent decades. These have hurt “low-paid workers much more than those at the top”. Even the Organization for Economic Cooperation and Development club of rich countries has “worryingly” noted these trends.

    The IMF Deputy Managing Director has explained why wages do not have to be suppressed to avoid inflation. Letting nominal wages rise will mitigate rising inequality, plus declining labour income shares (Figure 1) and real wages.

    Source: IMF, World Economic Outlook, April 2017

    Profit margins had already risen, even before the Ukraine war and sanctions. US trends prompted the Bloomberg headline, “Fattest Profits Since 1950 Debunk Wage-Inflation Story of CEOs”. Aggregate profits of the largest UK non-financial companies in 2021 rose 34% over pre-pandemic levels.

    Policymakers should therefore restrain profits, not wages. Recent price increases have been due to rising profits from mark-ups. Recent trends have made it “easier for firms to put their prices up” notes the Reserve Bank of Australia Governor.

    Addressing inequality

    The IMF Managing Director (MD) recently warned, “People will be on the streets if we don’t fight inflation”. But people are even more likely to protest if they lose jobs and incomes. Worse, the burden of fighting inflation has been put on them while the elite continues to enrich itself.

    Raising interest rates is a blunt means to fight inflation. It worsens living costs and job losses, while tax cuts mainly benefit the rich. Instead, the rich should be taxed more to enhance revenue to increase public provisioning of essential services, such as transport, health and education.

    The IMF MD noted raising taxes on the wealthy will help close the yawning gap between rich and poor without harming growth. Public provision of childcare and labour market programmes (e.g., retraining) will improve labour supply. Easing worker shortages can thus dampen price pressures.

    The current situation requires addressing growing inequality. Redistributive fiscal measures – taxing high earners to fund expanded social protection and public provisioning – are time-tested means to address disparities.

    Increasing top tax rates and tax system progressivity are also socially progressive, checking growing inequality. Meanwhile, as consumer prices spiral, rising profits and high executive remuneration have to be checked.

    Supply-side policies

    The World Bank and Bank of International Settlements heads have urged reducing the current focus on demand management to counter inflation. They both insist on addressing long-term supply bottlenecks, but do not offer much practical guidance.

    Poorly coordinated ‘unconventional’ monetary policies since the 2008-09 global financial crisis have created property and stock market bubbles. These damage the real economy, worsen inequality and slow labour productivity growth, with the worst spill over effects in developing counties.

    Addressing supply bottlenecks can involve tax incentives and credit policies. But discredited supply-side mantras – e.g., labour market deregulation – must be discarded. Related fiscal and monetary policies – e.g., tax cuts for the rich and inappropriate interest rate hikes – should also be abandoned.

    Governments are losing chances to boost productivity, achieve low carbon transformation and cut inequalities. Instead, policymakers should pro-actively push desired economic changes by favouring less carbon-intensive and more dynamic investments.

    This may also require checking CBs’ monetary policy independence to more effectively coordinate fiscal with monetary policies. But this should not undermine CBs’ ‘operational independence’ to foster “orderly economic growth with reasonable price stability”.

    Governments must rise to the extraordinary challenges of our times with pragmatic, appropriate and progressive policy initiatives. To do this well, they must boldly reject the ideologies and dogmas responsible for our current predicament.

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