Kenya says No to the IMF

Kenya’s eruption of protests, riots and government repression is the result of decades of failed western financial prescriptions writes Fadhel Kaboub in The Guardian  

It took several days of peaceful popular uprisings, violent confrontations with the police and the army, the illegal arrests and detention of protesters, the tragic death of several protesters at the hands of state security forces, and the burning of its parliament building for the Kenyan government to finally withdraw a finance bill that would have imposed the most extreme form of austerity in Kenya’s history.

Protesters held signs directly blaming the International Monetary Fund (IMF) for last year’s increases in VAT taxes, fuel and food prices, and for the new tax hikes proposed in the now defunct 2024 finance bill. This was in fact what the IMF has imposed on Kenya under the 2021 loan agreement for a 38-month program unlocking $3.9bn subject to periodic reviews designed to verify that Nairobi is actually doing what the IMF wants: to increase taxes, reduce subsidies and cut government waste (a code word for privatisation of state-owned enterprises).

Protesters also know that IMF-imposed austerity is backed by the United States, which, as the main shareholder in the organization, essentially holds a veto power on its programs. And every Kenyan knows that President William Ruto has become the new darling of the US and the G7 for agreeing to send Kenyan troops to Haiti, for not being too radical in his demands for reforming international financial architecture, for being conservative in representing Africa’s position in climate negotiations, and for accepting financing terms that favor the interests of foreign investors.

Kenya can have democracy or neocolonial extraction, but not both – because democracy means addressing the demands of the Kenyan people for jobs, healthcare, education, housing, transportation and basic social protections under a fair and equitable fiscal regime, while colonial extraction means the destruction of economic and monetary sovereignty, austerity for the poor, extravagant lifestyles for the elites, corruption, injustice and socioeconomic exclusion under a fiscal regime that accelerates the engines of economic entrapment.

One cannot democratize a system that hasn’t been structurally and economically decolonized yet. Despite Kenya’s democratic institutions, transparent elections, independent judiciary, freedom of speech and vibrant civil society spaces, its elected governments systematically undermine the social and economic demands of Kenya’s population – less because those governments wish to ignore the mandate given to them by the electorate, but because they face financial pressures from abroad that force them to prioritize external debt service and the financial needs of creditors and foreign investors.

In 2019, Kenya used 19% of its export revenues to service external debt; today that number has jumped up to nearly 50%. When a country uses half of its export revenues to pay interest on its external debt instead of investing in the basic pillars of development and prosperity, it is not surprising to see the kind of revolt that we have seen in Nairobi against the 2024 finance bill.

This makes Kenya a classic case of an economy steered from abroad, by colonial design rather than by accident.

The fact that Kenya is in a debt trap after decades of following IMF policy prescriptions means that either the IMF is incompetent or it is engaging in intentional economic entrapment. I believe it’s the latter. It is time to end the entrapment and to decolonize the Kenyan economy.

Decolonizing the Kenyan economy means escaping the colonial roles that were imposed on Kenya to serve as 1) the source of cheap raw materials, 2) the consumer of industrial output and technologies from the global north and 3) the recipient of obsolete technologies and outsourced assembly line manufacturing that is no longer needed in the industrialized countries, thus locking Kenya permanently at the bottom of the global value chain.

In fact, Kenya’s external debt crisis is the symptom of neocolonial structural traps that include food, energy and manufacturing deficits. First, Kenya’s largest agricultural exports are tea, cut flowers and coffee (colonial cash crops), while its imports include core crops like wheat, rice and corn. Second, Kenya’s largest import items are refined petroleum products.

And third, the kind of manufacturing that Kenya was allowed to have requires importing the machines, the fuel to power its factories, the intermediate components to be assembled by low-cost labor and even the packaging. As a result, Kenya’s exports have low value-added content, while its imports have high value-added content, which is why Kenya is locked at the bottom of the global value chain like the rest of the global south.

These structural trade deficits constantly weaken the Kenyan shilling relative to the US dollar, and with a weaker currency anything Kenya imports (food, fuel, medicine) becomes more expensive. Therefore, Kenya imports inflation with the most sensitive consumer items, which forces the Kenyan government to protect the most vulnerable people with defensive Band-Aid policies like food and fuel subsidies and exchange-rate management policies that require more external borrowing to stabilize the value of the shilling, thus accelerating the external debt crisis.

Decolonizing the Kenyan economy requires strategic investments in food sovereignty, agroecology, renewable energy sovereignty, and regional and Pan-African industrial policies. These are precisely the agenda items that are never discussed with G7, EU and US counterparts when they roll out the red carpet for President Ruto.

Unfortunately, despite being aware of these structural traps, Ruto has opted to listen to policy advice from global north institutions rather than Kenyan and Pan-African independent experts, thinktanks and civil society organizations.

Instead of limiting his demands for reforming the global financial architecture to lower borrowing rates, Ruto should be demanding the transfer of life-saving technologies to decolonize African economies, debt cancellation (not restructuring) and grants (not loans) for climate action. That would be the foundation for a finance bill that will meet the democratic needs and aspirations of the Kenyan people.

The Oligarch that took over Britain

 

Is the IMF fit for purpose?

As the world faces the worst debt crisis in decades, the need for a global lender of last resort is clearer than ever. But many nations view the IMF as overbearing, or even neocolonial – and are now looking elsewhere for help writes Jamie Martin in The Guardian

 
Last summer, after months of unusually heavy monsoon rains, and temperatures that approached the limits of human survivability, Pakistan – home to thousands of melting Himalayan glaciers – experienced some of the worst floods in its history. The most extensive destruction was in the provinces of Sindh and Balochistan, but some estimated that up to a third of the country was submerged. The floods killed more than 1,700 people and displaced a further 32 million – more than the entire population of Australia. Some of the country’s most fertile agricultural areas became giant lakes, drowning livestock and destroying crops and infrastructure. The cost of the disaster now runs to tens of billions of dollars.

In late August, as the scale of this catastrophe was becoming clear, the Pakistani government was trying to avert a second disaster. It was finally reaching a deal with the International Monetary Fund (IMF) to avoid missing payment on its foreign debt. Without this agreement, Pakistan would likely have been declared in default – an event that can spark a recession, weaken a country’s long-term growth, and make it more difficult to borrow at affordable rates in the future. The terms of the deal were painful: the government was offered a $1.17bn IMF bailout only after it demonstrated a real commitment to undertaking unpopular austerity policies, such as slashing energy subsidies. But the recent fate of another south Asian country appeared to show what happens if you put off the IMF for too long. Only weeks before, the Sri Lankan government, shortly after its own default – and after months of refusing to implement IMF-demanded reforms – was overthrown in a popular uprising.

The correlation of Pakistan’s crises – exceptionally devastating floods and the threat of economic meltdown – was partly bad luck. But it was also emblematic of a challenge faced by many countries at the forefront of the climate crisis: how can they afford to deal with extreme weather events and prepare themselves for the coming disasters, while suffering under crippling debt loads and facing demands for austerity as the price of relief?

Pakistan and Sri Lanka are only two of the many countries currently facing conditions of severe debt distress. Covid-19 delivered a major blow to many low- and middle-income countries that had borrowed heavily during the era of low interest rates beginning with the 2008 financial crisis. As the costs of public health and welfare rocketed, economies were locked down and tourism collapsed, which meant that tax revenues plummeted. The pandemic also disrupted global supply chains, leading to shortages of many goods and higher prices. These inflationary pressures were then exacerbated by Russia’s invasion of Ukraine. Meanwhile, the decision of the US Federal Reserve to raise interest rates to reduce US inflation has pushed the value of the dollar to its highest level in 20 years. This has made the debt of countries that borrowed in dollars – many do – more expensive since their currencies are worth less, while further increasing the cost of their imports. Rising US interest rates have also encouraged investors to pull capital out of riskier emerging markets at a historic rate, since safer dollar investments now produce higher returns.

The result is that the world economy faces the possibility of one of the worst debt crises in decades, threatening deep recessions, political instability, and years of lost growth. At the same time, the increase in extreme weather events – stronger hurricanes, recurring droughts – makes life even harder for states that already dedicate a large portion of their revenues to servicing foreign debt. In the midst of this turmoil, the IMF has become more involved in bailing out countries than it has in years. Over the last few months, the value of its emergency loans reached a record level, as a growing number of states turned to it for help, including Bangladesh, Egypt, Ghana and Tunisia.

Broadly speaking, the way the IMF works is by collecting financial resources from members and then offering them short-term assistance in the case of financial hardship. Based in Washington DC, the institution is staffed by representatives of ministers of finance and central bank governors from around the world. Because voting power is weighted by each state’s financial contribution, the US, as the IMF’s largest shareholder, exercises outsized influence over its major decisions and can veto proposed reforms to its governance. But as an international body that counts nearly every sovereign state as member, the IMF plays a unique role in the world economy. It’s the only institution with the resources, mandate and global reach to help almost any country facing severe economic distress.

But in exchange for its help, the IMF typically insists governments do what they find most difficult: reduce public spending, raise taxes and implement reforms designed to lower their debt-to-GDP ratios, such as cutting subsidies for fuel or food. Unsurprisingly, politicians are often reluctant to undertake these measures. It’s not just that the reforms often leave voters worse off and make politicians less popular. National pride is also at stake. Bowing to demands from an institution dominated by foreign governments can be seen as humiliating, and an admission of domestic dysfunction and misgovernance.

 

On the rare occasions that the IMF criticises the policies of a wealthy European state, this too can embroil the institution in domestic political conflicts. In September, the IMF’s criticism of Liz Truss’s proposed tax cuts provided ammunition to her political opponents and contributed to a slump in the pound’s value. The decision to sack chancellor Kwasi Kwarteng was taken while he was attending the IMF’s annual meeting in Washington DC, where the institution’s leading officials did little to mask their disapproval of his policies. In future histories of the fall of Truss, the IMF is likely to play a not insignificant role.

Despite all this, the IMF is not the kingmaker it once was. After reaching the height of its powers in the 90s, when its name became synonymous with the excesses of neoliberal globalisation and US overreach, the IMF has faced increasing resistance. It’s still the only institution that can guarantee assistance to nearly any country experiencing extreme financial stress. But the decline of US power, emergence of alternative lenders, and the IMF’s reputation as a domineering taskmaster has left it an anomalous position. It is much needed and little loved, enormously powerful and often ineffectual in getting states to agree to its terms. If predictions are correct that the world is entering an extended period of economic turmoil, this will only increase the need for some kind of global lender of last resort. Whether the IMF is up to the task depends on whether it has learned from its chequered history.

One of the most remarkable aspects of the IMF was what, in theory, it was supposed to accomplish when it was established – and how quickly it departed from this initial vision. The creation of the IMF was agreed at the Bretton Woods Conference of July 1944, when representatives from more than 40 countries met to rewrite the rules of the world economy. Led by the world-famous British economist John Maynard Keynes and his US counterpart Harry Dexter White, their aim was to create an international monetary system that stabilised currencies and facilitated a return to freer trade. National currencies would be set at fixed but adjustable rates to the dollar, which was in turn convertible to gold at a fixed rate of $35 per ounce.

The role of the IMF in this system was to help member states suffering from short-term balance-of-payments problems, while its partner organisation, the World Bank, made long-term loans for reconstruction and development. Crucially, in this original vision, the IMF would help members weather financial instability without browbeating them into undertaking painful policies such as cutting budgets or raising interest rates in the middle of a recession. This marked a break with the previous gold standard system, which from the late 19th century had provided predictable and stable exchange rates for countries that kept the value of their currencies fixed to a specific quantity of gold. This stability had come at the cost of being able to implement expansive national economic policies during a crisis. By contrast, officials involved in the creation of the IMF insisted that it avoid developing what Keynes referred to as “grandmotherly powers”, meaning finger-wagging, moralising strictures that unduly curtailed the freedom of member states.

Shortly after the end of the second world war, however, European representatives in the IMF’s executive board discovered that – despite an apparent wartime consensus shared by their more powerful US counterparts – the IMF was going to readopt an unpopular practice associated with earlier periods of financial imperialism: attaching policy conditions to its loans. To their chagrin, the institution would be authorised to intervene in sensitive domestic matters concerning fiscal and monetary decisions. US representatives were wary of allowing members access to the dollar without strings attached. And because the IMF had been designed in ways that gave the US unparalleled control over its activities, their prerogatives held sway. It was not in Europe that the IMF first deployed these interventionist powers, though; it was in the so-called third world, beginning in South American states such as Chile, Paraguay and Bolivia in the 50s.

After the collapse of the Bretton Woods system in the early 70s, when Richard Nixon removed the US dollar’s peg to gold, the IMF appeared to be out of a job. But it quickly took on new prominence in making bailout loans to financially unstable states. These loans came with demands for major structural reforms (privatisation, deregulation, the removal of tariffs) in addition to fiscal and monetary restraint. What made the IMF so mighty was that other creditors – whether commercial banks such as Citibank, or foreign governments – often considered a prior arrangement with the institution as a sign of a country’s creditworthiness. When the Soviet Union collapsed in the early 90s, the IMF undertook its most ambitious task yet, overseeing the transition of nearly-formerly Soviet republics to capitalism. In the process, it became, as the political scientist Randall Stone put it, the “most powerful international institution in history”.

As the IMF reached the height of its influence in the 90s, however, it sparked a global backlash that continues to this day. And the place where that backlash began was in Asia.

The Asian financial crisis is poorly remembered in the west, having been overshadowed by the 9/11 terrorist attacks and the “war on terror”. But it was an enormously consequential event, and its impact would reshape the global economy over the next 25 years. It began in the summer of 1997, when the collapse of the Thai baht sparked a financial panic that spread quickly throughout the region. As investors dumped one shaky currency after another, the panic became self-perpetuating, wreaking havoc from Indonesia to South Korea, and to countries as far off as Russia and Brazil.

The IMF quickly stepped in to offer rescue loans to the worst-hit countries, including Thailand, Indonesia and South Korea. The conditions of these loans included the institution’s perennial demands for austerity and tighter monetary policies – even though none of these governments had run significant deficits, nor seen much inflation in their economies in the run-up to the crisis. The IMF also insisted on a long list of reforms designed to liberalise their economies and, in particular, to dismantle practices and institutions derided as corrupt and inefficient forms of “crony capitalism”. In South Korea, the IMF set its sights on the country’s huge conglomerates, or chaebol, such as Hyundai, which enjoyed close ties to the state and domestic banks. In Indonesia, the IMF called for uprooting the vast system of patronage that enriched the family of long-ruling autocrat Suharto, such as the lucrative national clove monopoly, which produced a key ingredient of the kretek cigarettes popular in Indonesia, and was controlled by one of Suharto’s sons.

By intervening in sectors that had little to do with the currency crisis, the IMF appeared to be announcing the scale of its ambition. It wanted to transform what had, until then, been widely considered well-run economies. In particular, it seemed dead set on overturning what was known as the “Asian Model” of economic management, characterised by state-led investment in specific industries and firms. This approach had yielded impressive results in several countries, not least Japan, which then boasted the world’s second-largest economy. But it was widely seen by western officials and investors as anachronistic. To them, the crisis had rung the death knell for this Asian statist alternative to the Anglo-American laissez-faire approach.

This reformist zeal made the IMF unpopular across much of Asia. People were especially infuriated by demands to lift restrictions on foreign ownership of domestic firms. As US and European corporations swooped in to buy up financial institutions in Thailand and South Korea at steep discounts, many denounced the IMF as neo-colonial. In China, which was spared from the worst of the crisis, the state-owned People’s Daily newspaper accused the US of “forcing east Asia into submission”. Even Raghuram Rajan, who became the IMF’s chief economist in 2003, later admitted that the institution’s handling of the crisis had left it vulnerable to charges of financial colonialism.

Meanwhile, austerity measures such as cutting subsidies to fuel and foodstuffs like rice and flour, in countries undergoing severe cost of living and unemployment crises, fed growing political turmoil. The crisis was especially dire in Indonesia. As the rupiah continued to plunge into 1998, the country was gripped by political discontent and violence, as mob attacks on the ethnic Chinese minority led to scores of deaths. In Jakarta, the military fired on student protesters at Trisakti University, killing four and fanning the flames of riots spreading across the country. When Suharto raised fuel prices to fulfil IMF demands to produce a budget surplus, opposition intensified. In May 1998, he was forced from office.

At the time, defenders of the IMF insisted Suharto had been the author of his own downfall, claiming he had refused to implement reforms quickly enough to halt a crisis caused by his own corruption. But other contemporaries recognised that insisting he instantly uproot the entire system of patronage on which his regime relied was an impossible demand. “It’s crazy to ask people to commit suicide,” one diplomat remarked at the time.

Looking at images of Suharto signing the terms of an agreement with the IMF in January 1998, as the institution’s managing director, the French economist Michel Camdessus, loomed over him, it wasn’t hard to see this as a humiliating surrender of sovereignty. And it did not take conspiracists to recognise that the US Treasury and many western investors wanted Suharto gone, despite the opposition of the state department and Pentagon to anything that threatened the stability of a US strategic partner in the Asia-Pacific region. While the IMF didn’t plot Suharto’s removal, there was little question that US Treasury officials had come to see regime change as the only salvation for the Indonesian economy. As Camdessus himself later admitted: “We created the conditions that obliged Suharto to leave his job.”

To some American observers, Indonesia had proven an iron law of history: that the growing material prosperity of a citizenry would inevitably cause them to reject autocratic rule. What happened to Suharto, they said, would eventually happen to the Chinese Communist party. (Some predicted the exact year – 2015 – that China would see its equivalent popular uprising.)

What went less commented on was the obvious wakeup call the crisis and its political effects delivered to other governments. The lesson was clear: make yourself able to resist a crisis of financial globalisation and, if it comes, be sure you can deal with it on your own. 

For many states, the Asian crisis was a warning. In the event of a future financial crisis, they wanted to avoid calling in any institutions that might interfere in their domestic affairs. One way to do this was to build up huge stockpiles of foreign currency reserves. At a moment of crisis, these reserves can be used to defend a currency’s value, pay off foreign debts and import necessities. China led the way, but South Korea, Brazil, Mexico and others followed. From 2000 to 2009, the total value of China’s reserve assets grew by nearly $1.8tn. Today, it’s well over $3tn – a figure higher than the total GDP of the entire African continent.

For some countries, accumulating these reserves has been key to a strategy of export-led development, since doing so can help hold down the value of a national currency and thus make exports more competitive. But for most states, the aim has been insurance against financial turmoil. And in some cases, it’s worked remarkably well. The accumulation of currency reserves helped many emerging market economies escape the worst of the global financial crisis that began in 2008. While the IMF played a major role in bailing out Greece in the 2010s, it did comparatively little elsewhere. It was not invited back to countries where it had become so controversially involved in the 90s, such as South Korea and Russia.

One striking consequence of this currency stockpiling is that capital now moves in huge quantities from poorer countries to wealthier ones, rather than vice versa. This is because much of the world’s supply of reserves are held in US dollars, which countries tend to invest back into the safe haven of US treasury bills. Doing so guarantees a nearly bottomless global demand for US government debt and helps ensure the continued centrality of the US dollar to the global economy. The fact that China sits on such a huge stockpile of US treasuries has long generated anxiety about the political leverage this might give Beijing over Washington, since a sell-off would be catastrophic to the value of the dollar. But because it would also be catastrophic to the Chinese economy, the threat has never been close to realisation.

Not all states can afford to pile up currency in this way. For those that can, it is not painless, since it diverts resources away from public investment. Some economists have wondered why governments opt for it, suggesting that the opportunity cost of reducing public investment may outweigh the possible savings of averting a financial crisis. But hoarding these assets is not just a matter of economics. It’s also political and strategic policy designed to guarantee states the kind of autonomy that Indonesia, Thailand and South Korea bargained away during the 1997-98 crisis. Seen in this way, there’s little price that’s not worth paying for full sovereignty. The historian Adam Tooze has aptly referred to the strategies pursued by emerging market economies since the 90s as programmes of “self-strengthening” – a term originally used to describe the efforts of states like China and Japan in the late 19th century to reform their government administrations, militaries and economies to resist the incursion of powerful western empires.
 

Take Russia, a country that experienced a long and painful engagement with the IMF in the 90s. After defaulting on its sovereign debt in 1998, Russia, under its new president Vladimir Putin, began to amass a stockpile of reserves in the 2000s, facilitated by rising oil prices. By 2008, it sat on such a huge war chest that it could spark an aggressive war with Georgia without much concern for the financial repercussions. Russia appeared to have won new strategic independence.

A similar calculus was likely at play with Putin’s decision to invade Ukraine this year. But in one of the most far-reaching countermoves of Putin’s enemies, the US and its G7 partners targeted the foreign assets that were owned by the Russian central bank, but which they ultimately controlled. In late February, more than $300bn of Russian assets were immobilised in a move designed to paralyse Russia. The same tactic had been used just a few months earlier, when the dollar assets of the Afghan central bank had been frozen to hobble the Taliban in the wake of Kabul’s fall.

In Russia’s case, this strategy failed to end the war. And some worry it will backfire, encouraging states to rethink holding US dollars as a guarantee of economic stability. If the Asian financial crisis had the effect of turning countries away from the IMF and towards stockpiling reserves, the war in Ukraine may similarly push them away from the dollar as the reserve currency of choice. Were this to happen, the impact would be seismic. The dollar would be dethroned, losing its status as the world’s principal safe haven-asset. More likely, others argue, is further diversification away from dollars to other currencies. The ambitious US and European financial sanctions against Russia may prove, over time, to have similar effects to the IMF’s response to the Asian financial crisis: encouraging states to reconsider how they guarantee their autonomy in a global economy whose infrastructures they do not control.

Over the past decade, the IMF has made significant efforts to repair its reputation. In the wake of the global financial crisis, it became routine for IMF officials to publicly acknowledge that austerity could be counterproductive and that tackling inequality had become one of the institution’s central concerns. The selective use of once-taboo policies such as capital controls to restrict the flow of foreign capital into and out of a national economy was reconsidered, while demands for far-reaching domestic structural reforms were supposedly a thing of the past. When the official IMF publication Finance and Development ran an article in 2016 with the provocative headline Neoliberalism: Oversold?, many media outlets reported it as a sign of the institution undergoing a significant transformation. “What the hell is going on?” was how one longtime critic of neoliberalism, the Harvard economist Dani Rodrik, greeted news of its publication.

But in practice, the IMF’s transformation has itself been oversold. As the scholars Alexander Kentikelenis, Thomas Stubbs and Lawrence King showed in an article from the same year, the IMF, despite these rhetorical shifts, continued to insist on just as many, if not more, of the same structural reforms of borrowers as ever – sacking civil servants, cutting pensions, lowering minimum wages. A 2020 study by the Global Development Policy Center at Boston University found something similar. Today’s IMF, it noted, recognises that austerity constrains growth – while continuing to demand austerity from states in receipt of its aid.

Yet the Boston University study also reached another conclusion – one that shows how, despite itself, the institution may be undergoing real changes, not from ideological shifts alone, but from competition for its business. Researchers found that borrowers that had prior loan arrangements with China tended to get more lenient treatment from the IMF. Why? Probably because China does not make austerity or domestic reforms the price of its loans, which pushes the IMF to moderate its terms with clients that have access to this unconditional financing. Other studies have found a similar phenomenon at work at the World Bank.

China is now the world’s largest bilateral lender, a fact that has generated considerable anxiety in the west. Lending without policy strings attached is sometimes seen as Beijing’s way of buying goodwill with corrupt autocrats. China is also accused of “dept trap” diplomacy, by making loans to states to invest in unaffordable “white elephant” infrastructure projects. When these states can’t repay their debts, Chinese officials insist they give up valuable assets, like a 99-year lease over a strategic port, such as happened in Sri Lanka in 2017.

Critics of China have described Sri Lanka’s descent into financial and political turmoil as the logical end point of Beijing’s predatory lending. It’s true that the Rajapaksa brothers, who traded off ruling Sri Lanka from the mid-00s until this summer, pursued an extravagant programme of Chinese-financed infrastructure building. But when the Sri Lankan economy collapsed earlier this year, the government actually owed more money to private bondholders in Europe and the US than to China – despite the role Beijing had played in financing the country’s infrastructure boom. It’s too simple to see Sri Lanka solely as the victim of Chinese debt diplomacy.

Today, many are looking for clues on the nature of China’s role as lender in how it navigates its first global debt crisis. Over the last few years, it’s started making more emergency bailouts, setting itself up even more as a direct alternative to the IMF. But even critics of the IMF see the institution – with its broad membership, global reach and public aims – as playing a meaningfully different role in the world economy from a state actor like China, which – like all states – will make loans largely for the sake of its strategic aims and national interests. This is why many reformers calling for changes to the international financial system – such as Mia Mottley, the prime minister of Barbados – still focus on the IMF. Despite its history of missteps, and close ties to US foreign policy objectives, the institution is still seen as being uniquely able to provide something approximating a global financial safety net.

Given its continued dominance of the IMF, it is from the US that the greatest pressure to actually reshape the institution will have to come. There are signs that the current global crisis is forcing political change. In October, just before the annual meeting of the IMF and World Bank, the former Treasury secretary Lawrence Summers called on the institution to develop new, unconditional ways of providing financial assistance to states facing extreme pressures, as central banks raised interest rates. The political stigma involved in traditional IMF forms of lending, Summers suggested, was pushing states away from the institution when they needed it most. 

It was extraordinary to see Summers making this case. During the Asian financial crisis, Summers had been deputy secretary of the US Treasury. He had played a leading role in coordinating Washington’s response to the crisis through the IMF. He had even met with Suharto in Jakarta to personally convince him to agree to its terms. But now, the world economy needed a kind of financial assistance, Summers implied, that moved past the legacy of the interventionist IMF, whose powers he himself had once helped to unleash. This year’s annual meetings, which failed to consider ambitious measures to rescue the world economy, he claimed, would be remembered as nothing more than a “missed opportunity”.

As the Fed’s decisions threaten a new wave of global economic instability, these meetings may also be remembered for something else entirely: as an illustration of the paradoxical nature of US power in the third decade of the 21st century – mighty enough to break the world, but not to put it back together again.

John Pilger on Journalists, BBC, NHS, Amnesty and State Murder

 

The secret of Johnson’s success lies in his break with Treasury dominance

Gordon Brown’s rule-based approach shaped Whitehall for two decades. But the Tories are forging a new politics that has little regard for prudence writes William Davies in The Guardian

 

Illustration: Eva Bee/The Guardian Thu 20 May 2021 07.00 BST

 

The Conservative party’s growing electoral dominance in non-metropolitan England, so starkly re-emphasised by results in the north-east, has been attributed to various causes. Brexit and the popularity of Boris Johnson both count for a great deal. But while Labour is busy telling voters how much it deserved to lose, this is only half the picture. A major part of Johnson’s appeal is the way he has escaped the shadow cast by one of Britain’s three most significant political figures of the past 45 years: not Margaret Thatcher or Tony Blair, but Gordon Brown. 

The 1994 meeting between Blair and Brown at the Granita restaurant in Islington, north London, shortly after John Smith’s death, is the founding myth of New Labour: the moment when Brown agreed to let Blair stand for the leadership, on certain conditions. In addition to Blair’s much disputed commitment to serve only two terms in office should he become prime minister, there was also his promise that Brown, as chancellor, would get control over the domestic policy agenda. At least the second of these commitments was honoured, resulting in a situation where, from 1997 to 2007, the Treasury held an overwhelming dominance over the rest of Whitehall, while Brown was implicitly unsackable.

But, together with his adviser Ed Balls, Brown was also the architect of a new apparatus of economic policymaking designed for the era of globalisation. The central problem that Balls and Brown confronted was how to build the capacity for higher levels of social spending, while also retaining financial credibility in an age of far more mobile capital than any confronted by previous Labour governments. The fear was that, with financial capital able to cross borders at speed, a high-spending government might be viewed suspiciously by investors and lenders, making it harder for the state to borrow cheaply. The first part of their answer endures to this day: operational independence was handed to the Bank of England, accompanied by an inflation target. No longer could politicians seek to win elections by cutting interest rates, a move that aimed to win the trust of the markets.

On top of this, Brown also introduced a culture of almost obsessive fiscal discipline, as if the bond markets would attack the moment he showed any flexibility – the same paranoia that shaped Clintonism. His “golden rule”, outlined in his first budget, stated that, over the economic cycle, the government could borrow only to invest, not for day-to-day spending. The Treasury governed the rest of Whitehall according to a strict economic rubric, demanding every spending proposal was audited according to orthodox neoclassical economics.

Balls later wrote that their thinking had been guided by an influential 1977 article, Rules Rather than Discretion, in which two economists, Finn Kydland and Edward Prescott, sought to demonstrate that policymakers will produce far better economic outcomes if they stick rigidly to certain principles and heuristics of policy, rather than seeking to intervene on a case-by-case basis. Brown’s robotic persona and his mantra of “prudence” conveyed a programme that was so focused on policy as to be oblivious to more frivolous aspects of politics.

Elements of this Brownite machine remained in place during the David Cameron-George Osborne years: a chancellor acting as a kind of parallel prime minister, transforming society through force of cost-benefit analysis, only now the fiscal tide was going out rather than in. Even “Spreadsheet Phil” Hammond sustained the template as far as he could, in the face of ever-rising attacks from the Brexit extremists in his own party. The point is that, from 1997 to 2019, the government largely meant the Treasury. Those powers that are so foundational for the modern nation state – to tax, borrow and spend – were the basis on which governments asked to be judged, by voters and financial markets.

Various things have happened to weaken the Treasury’s political authority over the past five years, though – significantly – none of these has yet seemed to weaken the government’s credibility in the eyes of the markets. First, there was the notorious cooked Brexit forecast published in May 2016, predicting an immediate recession, half a million job losses and a house price crash, should Britain vote to leave. The referendum itself, a mass refusal to view the world in terms of macroeconomics, meant there could be no going back to a world in which politics was dominated by economists.

Consider how different things are now from in Brown’s heyday. Johnson’s first chancellor, Sajid Javid, lasted little more than six months in the job, resigning after one of his aides was sacked by Dominic Cummings without his knowledge. His second, Rishi Sunak, may have high political ambitions and approval ratings, but scarcely forms the kind of double-act with Johnson that Brown did with Blair, or Osborne with Cameron. Johnson’s cabinet is notable for lacking any obvious next-in-line leader.

What’s more interesting are the parts of Whitehall that have suddenly risen in profile under Johnson: communities and local government under Robert Jenrick, and the Department for Digital, Culture Media and Sport under Oliver Dowden. With the “levelling up” agenda of the former, (manifest in such pork barrel politics as the Towns Fund) and the “culture war” agenda of the latter (evident in attacks on the autonomy of museums), a new vision of government is emerging, one that is no longer afraid of expressing cultural favouritism or fixing deals. Balls and Brown were inspired by “rules rather than discretion”; now there’s no better way to sum up Jenrick’s disgraceful governmental career to date than “discretion rather than rules”.

In the background, of course, are the unique fiscal and financial circumstances produced by Covid, in which all notions of prudence have been thrown out of the window. With the Bank of England buying most of the additional government bonds issued over the last 15 months (beyond the wildest imaginings of Balls and Brown), and with the cost of borrowing close to zero, the rationale for strict fiscal discipline or austerity has currently evaporated. Paradoxically, a situation in which the Treasury can find an emergency £60bn to pay the country’s wages makes for a popular chancellor, but may make for a less powerful Treasury.

Amid all this, Labour is left in an unenviable position, which is in many ways deeply unfair. So long as the Tories are associated with Brexit, England and Johnson, the voters don’t expect them to exercise any kind of discipline, fiscal or otherwise. Meanwhile, Labour remains associated with a Treasury worldview: technocratic, London-centric, British not English, rules not discretion. What’s doubly unfair is that, thanks to the serial fictions of Osborne and the Tory press from 2010 onwards that Labour had “spent all the money”, it is not even viewed as economically trustworthy. In the end, it turned out that public perceptions of financial credibility were largely shaped by political messaging and media narratives, not by adherence to self-imposed fiscal rules.

In the eyes of party members, New Labour will be for ever tarred by Blair and Iraq. In the eyes of much of the country, however, it will be tarred by some vague memory of centralised Brownite spending regimes. The fact that Labour receives so little credit for Brown’s undoubted successes as a spending chancellor is due to many factors, but ultimately consists in the fact that the technocratic, Treasury view of the world was never adequately translated into a political story. Osborne simply presented himself as the inheritor of a centralised “mess” that needed cleaning up.

The recent elections demonstrated that all political momentum is now with the cities and nations of Britain: the Conservatives in leave-voting England, Andy Burnham in Manchester, the SNP in Scotland, Labour in Wales. Rather than making weak gestures towards the union jack or against London, Labour needs to think deeply about the kind of statecraft and policy style that is suited to such a moment, so as to finally leave the world of Granita and “golden rules” behind.

The Covid crisis is doing what the 2008 crash didn’t: ending the old economic orthodoxies

Larry Elliott in The Guardian

A wealth tax to help pay for the cost of fighting the pandemic. An international agreement to prevent a race to the bottom on corporate tax. An insistence that recovery from the second severe crisis in just over a decade should be green and inclusive. A conviction that governments should spend whatever it takes to fend off the threat of mass unemployment, paying no heed to the size of budget deficit.

There’s nothing startlingly new about any of these ideas, which have been knocking around for years, if not decades. What is different is that these are no longer just proposals put forward by progressive thinktanks or marginalised Keynesians in academia, but form part of an agenda being pursued by the International Monetary Fund and the US Treasury under Joe Biden’s presidency.

This matters. From the 1980s onwards, the IMF and the US Treasury forged what became known as the Washington consensus: a set of beliefs that was foisted on any country that ran into economic difficulties and came looking for help. The one-size-fits-all approach involved cutting public spending and taxes, and privatisation, to create incentives for risk-taking entrepreneurs, and making inflation the overriding goal of economic policy. These policies inevitably caused pain, but it was thought the “tough love” approach was worth it.

It has been quite a different story in the buildup to the IMF’s spring meeting this week. Biden’s fast-tracking of a $1.9tn stimulus package through Congress, including direct payments to struggling American families, was significant in two ways. First, at about 10% of the annual output of the US economy, it was much bigger than the emergency support provided by Barack Obama after the global financial crisis of 2008. Second, and perhaps more importantly, it contained no promises of future deficit reduction. Austerity has no part in the thinking of the Biden administration, and nor does the idea that demand fuelled by borrowing inevitably leads to higher inflation.

The next phase in Biden’s plan is to spend a further $2tn on rebuilding America’s crumbling infrastructure. This will be funded by reversing some of Donald Trump’s cut to corporate tax rates, which will be opposed by Republicans in Congress but not by the IMF. When asked about the projected increase this week, the fund’s economic counsellor, Gita Gopinath, said Trump’s corporate tax cut had not done much to boost investment. Moreover, Gopinath was positively enthusiastic about the idea of a global minimum corporate tax rate, something the US has traditionally been wary of but which it now supports.

For the past year, the IMF has been trying to increase the financial firepower of its member countries through currency reserves known as special drawing rights. Trump’s concern that Iran would secure these rights meant there could be no progress while he was in the White House. Under Biden’s treasury secretary, Janet Yellen, the deadlock has been broken and a $650bn special drawing rights allocation has now been announced.

If the old Washington consensus believed in small states, low taxes and balanced budgets, the new Washington consensus believes in activist governments, inclusive growth and a green new deal. Until relatively recently, the only outpost of the multilateral system that supported such ideas was the UN’s trade and development arm in Geneva.

That is no longer the case. This week’s regular IMF update on the state of the global economy emphasises how the pandemic has made pre-existing inequalities worse. That’s true within countries, where the virus and its economic consequences have been toughest on the poor, the young, women and ethnic minorities. It is also true between countries, with the central banks and finance ministries in advanced nations having far more scope to mitigate the impact of lockdowns than those in poorer parts of the world.

Both the IMF and its sister organisation, the World Bank, are clear that there can be no final victory in the battle against Covid-19 until everybody is vaccinated. The problem is not simply that developing countries lack sufficient doses; it is that their health systems are underpowered and lack the trained staff to deliver treatments. Similarly, if the world is to make the transition to a zero-carbon future, developing countries need to be included. That means extra financial resources. All this at a time when fears of a new developing-country debt crisis are rife.

Make no mistake, the IMF is still no soft touch. The conditions imposed as the price for financial support are often draconian, and critics note the disconnect between the right-on rhetoric of the IMF’s managing director, Kristalina Georgieva, and the policies imposed by her organisation’s missions to struggling countries.

Meanwhile, pushback against what Biden has been doing has come from both left and right. Some of the president’s critics accuse him of not being nearly radical enough; others are convinced that all the money creation by the US Federal Reserve and the deficit spending by the US Treasury will inevitably mean much higher inflation. Conjuring up the ghost of economist Milton Friedman, they say it will all eventually end in tears.

For now, though, it is the Friedmanites who look marginalised, with the pandemic accelerating a shift in economic thinking that has been gestating over the past decade. Biden’s approach to running the economy – spending freely and taking a tough line with China – has more in common with that of his immediate predecessor than it does with Obama.

The shift in attitudes has partly been caused by a lack of results. Austerity did not lead to the surge in private investment and faster growth that was promised. Instead, the 2010s were a lost decade of stagnant living standards, which explains why Bidenomics is a big hit with American voters.

Crises also encourage experimentation. Furlough schemes to subsidise the wages of those unable to work are not the same as a basic income, but they are similar enough to get people used to the idea. Necessity rather than ideology explains why Rishi Sunak has spent more than £400bn in the past year on emergency support programmes in the UK, but a Labour chancellor would have done much the same.

There is a sense in which history is repeating itself. It took more than a decade after the end of the first world war for the realisation to dawn that the gold standard was finished. It was the second rather than the first oil shock that opened the door to the economics of the new right in the 1980s. Those who thought that the financial crisis would result in a challenge to the Washington consensus were not wrong. The old nostrums are indeed being questioned. It has just taken 10 years longer than they were expecting, that’s all.

Why economists kept getting the policies wrong

 Philip Stephens in The FT

The other week I caught sight of a headline declaring that the IMF was warning against cuts in public spending and borrowing. The report stopped me in my tracks. After half a century or so as keeper of the sacred flame of fiscal prudence, the IMF was telling policymakers in rich industrial nations they should not fret overmuch about huge build-ups of public debt during the Covid-19 crisis. John Maynard Keynes had been disinterred, and the world turned upside down. 

To be clear, there is nothing irresponsible about the IMF’s advice that policymakers in advanced economies should prioritise a restoration of growth after the deflationary shock of the pandemic. The fund prefaced a shift last year, and most people would say it was common sense to allow economic recovery to take hold. Nations such as Britain might have learned that lesson from the damage inflicted by the ill-judged austerity programme imposed by David Cameron’s government after the 2008 financial crash. 

And yet. This was the IMF speaking — the hallowed (for some, hated) institution that, as many Brits will recall, formally read the rites over Keynesianism when in 1976 it forced James Callaghan’s Labour government to impose politically calamitous cuts in spending and borrowing. This is the organisation that in the intervening years had a few simple answers to any economic problem you care to think of: fiscal retrenchment, a smaller state and/or market liberalisation. The advice was heralded as the Washington consensus because of the IMF’s location.  

My first job after joining the Financial Times during the early 1980s was to learn the language of the new economic orthodoxy. Kindly officials at the UK Treasury explained to me that the technique of using fiscal policy to manage demand, put to rest in 1976, had been replaced by a new theory. Monetarism decreed that as long as the authorities kept control of the money supply, and thus inflation, everything would be fine. 

The snag was that every time the Treasury alighted on a particular measure of the money supply to target — sterling M3, PSL2, and M0 come in mind — it ceased to be a reliable guide to price changes. Goodhart’s law, this was called, after the eponymous economist Charles. By the end of the 1980s, monetarism had been ditched, and targeting the exchange rate had become the holy grail. If sterling’s rate was fixed against the Deutschmark, the UK would import stability from Germany.  

It was about this time that a senior aide to the chancellor took me to one side to explain that one of the great skills of the Treasury was to perform perfect U-turns while persuading the world it had deviated not a jot from previous policy. This proved its worth again when the exchange rate policy was blown up by sterling’s ejection from the European exchange rate mechanism in 1992. The currency was quickly replaced by an inflation target as an infallible lodestar of policy. 

The eternal truths amid the missteps and swerves were that public spending and borrowing were bad, tax cuts were good, and market liberalisation was the route to sunlit uplands. The pound’s ERM debacle was followed by a ferocious budgetary squeeze, and, across the channel, the eurozone was designed to fit a fiscal straitjacket. Financial market deregulation, we were told, oiled the wheels of globalisation. If madcap profits and bonuses at big financial institutions prompted unease, the answer was that markets would self-correct. Britain’s Labour government backed “light-touch” regulation in the 2000s. The Bank of England reduced its oversight of systemic financial stability. 

The abiding sin threaded through it all was that of certitude. Perfectly plausible but untested theories, whether about the money supply, fiscal balances and debt levels, or market risk, were elevated to the level of irrefutable facts. Economics, essentially a faith-based discipline, represented itself as a hard science. The real world was reduced by the 1990s to a set of complex mathematical equations that no one, least of all democratically elected politicians, dared challenge. 

Thus detached from reality, economic policy swept away the postwar balance between the interests of society and markets. Arid econometrics replaced a measured understanding of political economy. It scarcely mattered that the gains of globalisation were scooped up by the super-rich, that markets became casinos and that fiscal fundamentalism was widening social divisions. Nothing counted above the equations. And now? After Donald Trump, Brexit and Covid-19, it seems we are back at the beginning. Time to dust off Keynes’s general theory.

To lead Britain through a crisis, you have to be able to see beyond it: Gordon Brown abandons Neoliberal Economics

When the economy collapsed in 2008, I had to think ahead. I fear too little thought has been given to our recovery after Coronavirus writes Gordon Brown

‘Our young people now face the worst labour market for 50 years.’ Photograph: Hollie Adams/Getty Images


Our country’s Covid-19 crisis, together with the economic crisis the pandemic brought with it, is not over. In fact, it is entering a dangerous new phase.

With the UK economy collapsing by 25% in March and April – a fall twice as bad as those in Europe and the US and now only halfway back to pre-crisis level – a recovery plan is needed: closer to France’s £90bn, Germany’s £115bn and the US’s £1tn is required, not the £30bn announced by the chancellor in July.

Millions of people – not 200,000 as now – must be tested every day if the mass return to the workplace is not to result in a second wave of the disease.

And, if the end of the furlough scheme on 31 October is not to bring the highest number of redundancies in living memory, new job-protection measures – based on the Office for Budget Responsibility’s assessment that unemployment could reach 3m – will have to be implemented in the next few days.

Already I see the Conservative economic doves of the spring reverting to type, emerging as the grasping fiscal hawks of autumn, unable to see that every economic orthodoxy has been turned on its head.

Having led the country through one big crisis after 2008 – I had to learn quickly, and learn from my own mistakes – I can feel some sympathy for Boris Johnson, even though mea culpa is the one Latin phrase that will never cross his lips. But I found back then that it was not enough just to do day-to-day crisis management, or even to be one step ahead of events; the real challenge is to anticipate the next problem but one.

More than that, to solve each problem I had to get to the root of it, often by overriding conventional thinking, and following that up with a relentless determination to mobilise all the weapons at one’s disposal. In 2008 the banks were running capitalism without capital, so we nationalised strategically important financial institutions.

Now, in 2020 and still in the absence of a vaccine or a cure, we should have been clear from the outset that regular mass testing was – and still is – the effective way to detect the spread of the disease and then to respond with prompt local public health interventions.

But I fear that those responsible – having misspent millions on contracts for serially ineffective initiatives – have given too little thought to what also matters in the days ahead: engineering the long-term recovery.

Investing now – to save good companies and prevent the destruction of capacity and the loss of key jobs and skills for good – means following Germany and France by maintaining furlough payments in key sectors, preferably with a wage subsidy for part-time work, and with the backstop offer of retraining during absence from the workplace.

And, where workers have to stay at home to avoid the spread of infections during the inevitable increase of pandemic-related local lockdowns, the support available to them has to feed their families, which today’s miserly £90 a week does not.

Our young people now face the worst labour market for 50 years – yet today’s youth employment programme will assist only 350,000, and only for six months, when there are 3.5 million under-25s who are not in full-time education. So to guarantee a job, training or education requires a far more rapid expansion of new apprenticeship, college and university places, along with the re-introduction of the more generous future jobs programme that we had in 2009.

Tory austerity was never a good idea and is now an admitted failure. But it is frankly an economic absurdity when government borrowing costs are so small – 10-year gilt yields are around one-20th of those of 2008 – and unmet needs so extensive.

Indeed inflation – once seen as the justification for austerity economics – is so low in the US today that the Federal Reserve has deemed that maximising employment will now be its main priority. Again, the UK is behind the curve. In 1998, serving as chancellor, I was responsible for the Bank of England Act, which required the Bank to pursue high levels of employment. Now I am the first to say that the Bank needs a more demanding constitution, one that imposes a dual mandate: to take unemployment as seriously as inflation. This should be matched by an operational target stating that interest rates will not rise or stimulus end until unemployment falls to pre-crisis levels.

The current crisis is of course global as much as it is domestic. From 2008 to 2010, I spent much of my time persuading my fellow leaders to act as one, and to agree a synchronised stimulus alongside aid for developing countries. But I am shocked that now – with the world’s economies simultaneously damaged by the pandemic and an economic shock far worse than back then – the world’s leaders have done so little work together in response.

In short, all countries should be agreeing to call time on 50 years of neoliberal economics. They should break not only with their exclusive focus on controlling inflation, but with the pursuit of deregulation, liberalisation and privatisation at the expense of fairness, employment and sustainability. That project, once called the Washington consensus, is out of favour even in Washington. A new paradigm would give priority to fair trade, not just free trade; better control of the management of destabilising capital flows to replace the current free-for-all; a competition regime that can robustly address monopolistic behaviour from rent-seeking digital platforms; an industrial policy that would include generous support for science and innovation – with all that wrapped in a commitment to action on climate change and action on unacceptable levels of inequality.

Could it happen here? I believe so. While the government may feel able to steamroller its policies through the House of Commons thanks to an 80-seat majority, our multinational and increasingly regionally diverse country can no longer be straitjacketed, as now, by a remote and failing centralised state.

In contrast to the tiny and fallible cabal in No 10, democracy is rising again elsewhere: no longer just MPs and local councillors, but directly elected metro mayors and elected decision-making bodies in Scotland, Wales and Northern Ireland. And, as with the outrage against the government’s breach of international law, a rebellion of the regions and nations could force the prime minister to listen.

A challenge no doubt, especially with this prime minister. But he is already worried about the fragility of his recently acquired strength in the north of England; and as a unionist, he knows he must also take heed of voices in Scotland and Wales, where his popularity is waning fast. Politically – and despite his formidable record in the genre – he knows he cannot afford a U-turn on the union.

A strong alliance encompassing trades unions and businesses too can thus not only press for a recovery plan but also revive the spirit of cooperation and unity across our country – and, through a newfound solidarity, give the British people what we need most: hope.

Have Economists Have Changed their Views on Public Debt?

The national debt was the bogeyman in 2008/9 not anymore writes Ethan Ilzetzki in The Guardian

 

 

The chancellor, Rishi Sunak (right), visits a London market on 1 June. Photograph: Simon Walker/PA


The coronavirus pandemic has taken a calamitous toll on the economy, with unemployment in April 2020 rising faster than in any month on record. The Treasury has responded with unprecedented measures to support workers, businesses and the self-employed, leading to a public deficit of £300bn this year.

How concerned should we be about the public debt, forecast to exceed the size of the UK economy? Public debt results when the government spends more than it raises in tax revenues – runs a public deficit – and borrows money to cover the gap. The government then pays interest on this debt, which is eventually repaid or rolled over by new borrowing. As long as interest rates are low – they are currently nearly zero – this poses few costs. The economy may also grow, generating more tax revenues and making it easier to repay the debt. But if interest rates rise faster than the economy grows, the public debt may increase to unsustainable levels. These may eventually require budget cuts or tax increases, often referred to as austerity.


These views are a far cry from the calls for budgetary cuts during the global financial crisis

The Centre for Macroeconomics (CfM) – a research centre bringing together experts from institutions such as the London School of Economics, University of Oxford, University of Cambridge and the Bank of England – posed this question to a panel of some of the UK’s leading economists. Economists are a conservative lot: we like budgetary numbers to add up. So the responses might come as a surprise. With one exception, not a single panel member expressed concern about the deficit. What’s more, the majority thought that public debt should be ultimately addressed with tax increases, particularly on the wealthy; and the panel unanimously opposed public spending cuts. Several even advocated monetary financing of the deficit, in other words selling government bonds directly to the Bank of England. These days, not even economists support austerity.

These views are a far cry from the calls for budgetary cuts during the global financial crisis and reflect a substantial shift in economic thought that has been unfolding over the past few decades. The change isn’t solely a British phenomenon. German economists were particularly uncompromising on limiting deficits during the Eurozone crisis. But a new generation of German economists has been the vanguard in promoting “coronabonds”, which would mutualise debts of EU members. The International Monetary Fund (IMF) was well-known for its conservative views on public deficits. The global financial crisis brought change to the institution, with its then chief economist, Olivier Blanchard, openly advocating stimulus over austerity.

Economic stabilisation through public spending was the brainchild of John Maynard Keynes during the Great Depression. But the Keynesian moment in economic thought was relatively short-lived. The global inflation of the 1970s brought a new generation of economists, sceptical about governments’ ability to use their budgetary power to support economic recovery. Keynesian views had been pushed so far to the sidelines that the Nobel laureate economist Robert Lucas Jr pronounced “the audience starts to whisper and giggle to one another” whenever Keyensian views were espoused in economics research seminars.

These views seeped into the political consciousness to the extent that by 1976, the prime minister, James Callaghan, told the Labour party conference that the option of “spend[ing] your way out of a recession and increas[ing] employment by cutting taxes and boosting government spending” no longer existed and would only lead to inflation. These views were enshrined in the Washington Consensus, whose first principle, according to John Williamson, was: “Washington believes in fiscal discipline.”

The debate on the public debt re-emerged during the recession of 2008-9. A substantial faction in the economics profession continued to warn that fiscal stimulus was no way to recovery. At the same time, increasing numbers of mainstream economists, including the leadership of the IMF and Ben Bernanke, then head of the US Federal Reserve Board, supported the public spending expansions that the US government undertook and warned that the UK’s austerity programme would exacerbate the economic pain. The attitude shift was partly pragmatic. At the turn of the century, many economists had come to believe that central banks had the ability to resolve all macroeconomic woes. This position became less tenable when central banks around the world were running out of ammunition, having reduced interest rates to zero. 

The slow recovery in the UK and the economic carnage in southern Europe – both following austerity policies – compared with the faster recovery in the US, appeared to lend further credence to the notion that active fiscal policy could be used to support economic recovery. This new view perhaps reached its apogee in Blanchard’s 2019 presidential address to the American Economic Association, where he argued that public debt is no longer of concern when interest rates are well below the economy’s growth rate. Our confidence that high-income countries, which are still able to borrow at low interest rates, will be spared may be premature. Public debt is indeed no concern when interest rates are at zero. But history shows us that governments’ borrowing rates may change dramatically when market sentiment shifts.

Benign deficit neglect is a ultimately a rich-country luxury. The developing world is now in the midst of the greatest public debt crisis in a generation. Governments from Argentina to Zambia are financing their deficits with great difficulty. As investors repatriated their funds to the relative safety of the US, these countries have seen rising borrowing rates and tumbling currencies, and will require (or already in the process of) debt restructuring.

Governments’ top priorities should remain the public health emergency and supporting the economy through these difficult times. But it would be wise to keep half an eye on the public debt clock.