What's causing the wave of Economic Collapse?

 

The world lacks an effective global system to deal with debt

Rebeca Grynspan in The FT

There is an alarming tendency among the international community to regard debts in the developing world as sustainable because they can, after some sacrifice, be paid off. 

But this is like saying a poor family will stay afloat because they always repay their loan sharks. To take this view is to overlook the skipped meals, the foregone investment in education and the lack of health spending that forcibly make room for interest payments. This sort of debt trap is a social catastrophe in the making. Ten years from now, the debt may be repaid, but the family will be ruined. 

This is the dilemma facing many developing countries, both big and small. The pandemic, cost of living crisis and rising interest rates have brought them to a point where they can only pay their debts by way of austerity or foregone investment in the sustainable development goals (SDGs). Their debts are sustainable in that they can be repaid, but unsustainable in every other way. 

Furthermore, this full-blown development crisis with debt distress at its core also threatens a new lost decade for much of the world economy. 

The repeat of a 1980s-style debt crisis that could in turn threaten global financial stability is perceived to be marginal. But the public debt of developing countries, excluding China, reached $11.5tn in 2021. By some accounts, serious debt problems are largely confined to a small share of this figure, owed by highly vulnerable low-income countries such as Chad, Zambia or Ethiopia. 

But the situation is deteriorating rapidly. During the pandemic, government debt ballooned by almost $2tn in more than 100 developing countries (excluding China), as social spending went up while incomes froze due to lockdowns. Now, central banks are raising interest rates, which exacerbates the problem. Rising rates have meant capital flight and currency depreciation in developing economies, as well as increasing borrowing costs. These factors have pushed countries such as Ghana or Sri Lanka into debt distress. 

In 2021, developing countries paid $400bn in debt service, more than twice the amount they received in official development aid. Meanwhile, their international reserves declined by over $600bn last year, almost three times what they received in emergency support through the IMF Special Drawing Rights allocation. 

Foreign debts are therefore eating an ever-larger piece of an ever-shrinking national resources pie. As inflation rises, natural disasters become more frequent and food and energy imports rise in price, countries need more, not less, contingency planning assistance. 

A much bolder approach is needed. Recent efforts by the international community to agree on large-scale emergency debt measures have faltered. This is despite important efforts at the G20 through the now-discontinued Debt Service Suspension Initiative, and the Common Framework for Debt Treatments, which is in need of crucial improvements, such as suspending payments during negotiations and an extension to middle-income countries in debt distress. 

The failure of these efforts has revealed the complexity of existing procedures, characterised by creditors who refuse to engage in restructuring with extraordinary powers of sabotage. Crisis resolutions are often too little, too late. The world lacks an effective system to deal with debt. 

An independent sovereign debt authority that engages with creditor and debtor interests, both institutional and private, is urgently needed. At a minimum, such an authority should provide coherent guidelines for suspending debt payments in disaster situations, ensuring SDGs are considered in debt sustainability assessments, and providing expert advice to governments in need. 

Furthermore, a public debt registry for developing countries would allow both lenders and borrowers to access debt data. This would go a long way in boosting debt transparency, strengthening debt management, reducing the risk of debt distress and improving access to financing. Progress on both these fronts could begin with an independent review of the G20 debt agenda: India’s presidency may bring a historic opportunity to succeed where others have faltered. 

Tackling the current global debt crisis is not only a moral imperative. In a context of growing climate and geopolitical distress, it is one the biggest threats to global peace and security and financial stability. Without supporting countries to become sustainable, their debts will never be realistically repayable.

Pakistan - Caught in the Debt Trap

Sultan Ali Allana in The Dawn

THE 22nd IMF programme, circular debt, G2G loans and an imminent 23rd programme lurking around the corner. It reminds one of Jaws the movie, where danger creeps unseen and dread is prevalent amongst all. ‘Borrow more to borrow even more’ versus ‘earn more to borrow less’. Two very different courses, yet interchangeably deployed, admittedly intermittently, in varying blends, over the past 40 to 50 years, have shackled the nation to the debt trap.

Omnipresent in this murky blend, not unlike other debt-laden markets, are what the West terms as ‘economic hitmen’, who pursue self-interests, ostensibly for the greater good. These interests are then propagated scientifically, justified, and then, with the clever manipulation of economic data, communicated to every handheld device.

While economists and financial experts take turns at solving what has now become a complex equation, perhaps it’s time to go back to the basics, which may be termed as Solution 101 — ‘earn more and borrow less’ — a solution which is admittedly easier to state than actualise. It is a course which may well require our urgent attention and, most importantly, political convergence that entails all major political parties, irrespective of their manifestos, unanimously agreeing to sign off on a ‘charter of economy’ that marks milestones at five-year intervals — starting with ‘earn more and borrow less’ to ‘earn more and not borrow at all’ to, ultimately, ‘earn more and build reserves’.

Simply put, this charter may be a 15-year plan for this nation’s way forward and a performance measure to determine the economic achievements of each successive government. Politics and the economy must at all costs be separated in the interest of the nation.

Pakistan’s debt story is interwoven with the country’s 75-year journey. We entered the first IMF programme in 1958 and, since then, it has been one programme after another, while institutional and G2G debts have continued to grow simultaneously. As of Dec 31, 2021, combined foreign currency loans are more than $90.5 billion. The story of Pakistan’s debt is incomplete without taking into account domestic debt, which by the end of December 2021 had crossed Rs26.7 trillion (roughly $151.5bn based on the Dec 31, 2021, closing rate), resulting in total debt in excess of $242bn or around 77 per cent of GDP. There is also the circular debt, which grew from Rs161bn in 2008 to over Rs2.46tr by March 2022. It continues to grow, putting, oil, gas and power supply at risk.

A consolidated picture of Pakistani debt on a per person basis depicts the debt journey. Each Pakistani, irrespective of age and gender, carries upon their shoulders a debt burden of nearly Rs190,000, while devaluation and interest adds to this figure by the day. Pakistan must borrow to pay back its borrowings and borrow to pay back the interest on its borrowings. Bluntly put, we are no longer borrowing for growth, but to service and repay borrowings.

The government may be able to service local currency debt by raising taxes, at the cost of stunting growth; however, foreign currency earnings will have to be significantly enhanced through exports, remittances, privatisation and foreign investments, and imports will have to be managed to make the equation work. Without a balancing act, the debt cycle will grow to untenable levels.

Tough decisions and belt-tightening are essential. The country’s policy framework, which has relied on imports, belies the requirements of a paradigm shift in thinking. The emphasis needs to shift to the development of a robust agro economy, making Pakistan not just self-sufficient in food, thus ensuring future food security, but also a country that can be a global supplier of food. If oil can be extracted (at a cost) and countries can rise to heights unthinkable in the 1960s, surely, agro extraction (at a cost, undoubtedly) can become a source for sustaining growth, which in due course can accelerate industrial growth for a balanced economic model.

The cycle of boom-and-bust can only be broken if there is a meaningful shift in the policy framework. Granting subsidies without assessing the long-term consequences, or imposing heavy taxation regimes, which impair growth, must be examined and thought through. To quote Winston Churchill: “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up with the handles.” While building a strong SME and labour-intensive industrial base, with the aim of capitalising on the shifting industrial trend in China, is equally important, a focused approach, which entails start-to-finish government support — some call this the ‘ease of doing business’ — must be given top priority.

Competitive markets drive global agendas where Pakistan will have to situate itself and measure its competitiveness. What has not worked before will certainly not work going forward. It is imperative that we plan for future generations to provision for a fulfilling and debt-free life of progress, prosperity and security. We have heard the endless discussions of experts and also novices who have little understanding but who use economic jargon to impress with ‘solutions’. But why has nothing, or very little, worked? Framing policies, ensuring competency and challenging dogma require political consensus and hard work.

Freedom comes at a price and it’s a price we must pay someday. Climate change is upon us, where food security and water management will remain on top of the global agenda for decades to come. Gainful employment for our ever-growing and young population will be challenging. With over 366 million mouths to feed by 2050, surely this must be our primary concern. Debt and more debt are certainly not a solution. It is the problem!

The US’s selfish war on inflation will tip the world into recession

Phillip Inman in The Guardian


As the Fed raises interest rates, dollar-denominated loans become an unsustainable burden to states around the globe

The Federal Reserve is planning a second interest rate rise in a year this month. Photograph: Chris Wattie/Reuters 


Later in July US interest rates are expected to jump for a second time this year, and that’s going to wreck any chance of a global recovery.

The Federal Reserve could push its base rate up by as much as a full percentage point, ending 15 years of ultra-cheap money, intended to promote growth.

This jump, to a range of 2.5%-2.75%, would take the cost of borrowing money in the US to more than double the Bank of England’s 1.25%. And yet the Fed could just be taking a breather as it contemplates even higher rates.

This column, though, is not about the US. It is concerned with the terrible impact on Britain and countries across the world of America’s selfish disregard when it decides to tackle high inflation with higher borrowing costs. Britain is already feeling the effects of the Fed’s pledge to tackle inflation until it is “defeated”, come what may.

Higher interest rates in the US make it a more attractive place for investors to store their money. To take full advantage, investors must sell their own currency and buy dollars, sending the price of dollars rocketing higher.

In July the US dollar increased in value against a basket of six major currencies to a 20-year high. The euro has slipped below parity with the dollar in the last few days. The pound, which has plunged by more than 10% this year to below $1.20, is losing value with every week that passes.

In Japan, the central bank has come under huge pressure to act after the yen tumbled to its lowest level against the dollar since 1998.

There are two important knock-on effects for those of us that live and work outside the US.

The first is that goods and raw material priced in dollars are much more expensive. And most commodities are priced in dollars, including oil.

Borrowing in dollars also becomes more expensive. And while getting a loan from a US bank is beyond the average British household, companies do it all the time, and especially those in emerging economies, where funds in their backyard can be in short supply.

The Bank of England interest-rate setter Catherine Mann recently said that her main motivation for wanting significant increases in the UK’s lending rates was her fear that the widening gap with the dollar was pushing up import prices. And higher import prices meant higher inflation.

If only she could persuade her colleagues on the Bank’s monetary policy committee that the devaluation of the pound was a serious issue, maybe they would push up the Bank’s base rate in line with the Fed rate increases. After the Fed makes its move, more may join her.

Until January this year, Britain’s inflation surge was on course to be short-lived. Now it seems the Russian invasion of Ukraine and a splurge of untargeted handouts by the Biden administration during the pandemic, which have served to push up prices in America, will keep inflation in the UK high into next year. 

Those governments that have borrowed in dollars face a double whammy. Not only will they need to raise domestic interest rates to limit the impact of import price rises, they will also face a massive jump in interest payments on their dollar borrowings.

Emerging markets and many developing-world countries will be broke when these extra costs are combined with a loss of tourism from the Covid pandemic. Sri Lanka has already gone bust and many more could follow.

For the past three decades, western banks have marketed low-cost loans across the developing world as a route to financial freedom.

Zambia’s government borrowed heavily before the pandemic to become self-sufficient in electricity. It is a laudable aim, but has left the central African state with a ratio of debt to national income (GDP) much the same as France’s – about 110%.

The problem for Zambia is not the same as for France, which pays an interest rate of 1.8% to finance its debts, measured by the yield on its 10-year bonds. The Zambian 10-year bond commands a rate of 27%. Now Zambia, like France and so many other countries, must borrow simply to live. To invest is to borrow more.

There is no sign that the US will change course. Joe Biden is in a panic about the midterm elections, when fears of spiralling inflation could favour the Republicans. This panic has spilled over to the Fed, which has adopted hysterical language to persuade consumers and businesses that higher rates are coming down the track and to curb their spending accordingly.

The Fed knows inflation is a problem born of insufficient supply that only governments can tackle. But that doesn’t look like stopping it from pushing the US economy, and everyone else’s, into recession.

Never mind aid, never mind loans: what poor nations are owed is reparations

At Cop26 the wealthy countries cast themselves as saviours, yet their efforts are hopelessly inadequate and will prolong the injustice writes George Monbiot in The Guardian

Excerpt from a painting depicting the British East India Company in India, 1825-1830. Photograph: Print Collector/Getty Images  


The story of the past 500 years can be crudely summarised as follows. A handful of European nations, which had mastered both the art of violence and advanced seafaring technology, used these faculties to invade other territories and seize their land, labour and resources.

Competition for control of other people’s lands led to repeated wars between the colonising nations. New doctrines – racial categorisation, ethnic superiority and a moral duty to “rescue” other people from their “barbarism” and “depravity” – were developed to justify the violence. These doctrines led, in turn, to genocide.

The stolen labour, land and goods were used by some European nations to stoke their industrial revolutions. To handle the greatly increased scope and scale of transactions, new financial systems were established that eventually came to dominate their own economies. European elites permitted just enough of the looted wealth to trickle down to their labour forces to seek to stave off revolution – successfully in Britain, unsuccessfully elsewhere.

At length, the impact of repeated wars, coupled with insurrections by colonised peoples, forced the rich nations to leave most of the lands they had seized, formally at least. These territories sought to establish themselves as independent nations. But their independence was never more than partial. Using international debt, structural adjustment, coups, corruption (assisted by offshore tax havens and secrecy regimes), transfer pricing and other clever instruments, the rich nations continued to loot the poor, often through the proxy governments they installed and armed.

Unwittingly at first, then with the full knowledge of the perpetrators, the industrial revolutions released waste products into the Earth’s systems. At first, the most extreme impacts were felt in the rich nations, whose urban air and rivers were poisoned, shortening the lives of the poor. The wealthy removed themselves to places they had not trashed. Later, the rich countries discovered they no longer needed smokestack industries: through finance and subsidiaries, they could harvest the wealth manufactured by dirty business overseas.

Some of the pollutants were both invisible and global. Among them was carbon dioxide, which did not disperse but accumulated in the atmosphere. Partly because most rich nations are temperate, and partly because of extreme poverty in the former colonies caused by centuries of looting, the effects of carbon dioxide and other greenhouse gases are felt most by those who have benefited least from their production. If the talks in Glasgow are not to be experienced as yet another variety of oppression, climate justice should be at their heart.

The wealthy nations, always keen to position themselves as saviours, have promised to help their former colonies adjust to the chaos they have caused. Since 2009, these rich countries have pledged $100bn (£75bn) a year to poorer ones in the form of climate finance. Even if this money had materialised, it would have been a miserly token. By comparison, since 2015, the G20 nations have spent $3.3tn on subsidising their fossil fuel industries. Needless to say, they have failed to keep their wretched promise.

In the latest year for which we have figures, 2019, they provided $80bn. Of this, just $20bn was earmarked for “adaptation”: helping people adjust to the chaos we have imposed on them. And only about 7% of these stingy alms went to the poorest countries that need the money most.

Instead, the richest nations have poured money into keeping out the people fleeing from climate breakdown and other disasters. Between 2013 and 2018, the UK spent almost twice as much on sealing its borders as it did on climate finance. The US spent 11 times, Australia 13 times, and Canada 15 times more. Collectively, the rich nations are surrounding themselves with a climate wall, to exclude the victims of their own waste products.

But the farce of climate finance doesn’t end there. Most of the money the rich nations claim to be providing takes the form of loans. Oxfam estimates that, as most of it will have to be repaid with interest, the true value of the money provided is around one third of the nominal sum. Highly indebted nations are being encouraged to accumulate more debt to finance their adaptation to the disasters we have caused. It is staggeringly, outrageously unfair. 

Never mind aid, never mind loans; what the rich nations owe the poor is reparations. Much of the harm inflicted by climate breakdown makes a mockery of the idea of adaptation: how can people adapt to temperatures higher than the human body can withstand; to repeated, devastating cyclones that trash homes as soon as they are rebuilt; to the drowning of entire archipelagos; to the desiccation of vast tracts of land, making farming impossible? But while the concept of irreparable “loss and damage” was recognised in the Paris agreement, the rich nations insisted that this “does not involve or provide a basis for any liability or compensation”.

By framing the pittance they offer as a gift, rather than as compensation, the states that have done most to cause this catastrophe can position themselves, in true colonial style, as the heroes who will swoop down and rescue the world: this was the thrust of Boris Johnson’s opening speech, invoking James Bond, at Glasgow: “We have the ideas. We have the technology. We have the bankers.”

But the victims of the rich world’s exploitation don’t need James Bond, nor other white saviours. They don’t need Johnson’s posturing. They don’t need his skinflint charity, or the deadly embrace of the bankers who fund his party. They need to be heard. And they need justice.

Understanding Populism

Nadeem F Paracha in The Dawn


In a March 7, 2010 essay for the New York Times, the American linguist and author Ben Zimmer writes, “When politicians fret about the public perception of a decision more than the substance of the decision itself, we’re living in a world of optics.”

On the other hand, according to Deborah Johnson in the June 2017 issue of Attorney at Law, a politician may have the best interests of his constituents in mind, but he or she doesn’t come across smoothly because optics are bad, even though the substance is good. Johnson writes that things have increasingly slid from substance to optics.

Optics in this context have always played a prominent role in politics. Yet, it is also true that their usage has grown manifold with the proliferation of electronic and social media, and, especially, of ‘populism.’ Populists often travel with personal photographers so that they can be snapped and proliferate images that are positively relevant to their core audience.

Pakistan’s PM Imran Khan relies heavily on such optics. He is also considered to be a populist. But then why did he so stubbornly refuse to meet the mourning families of the 11 Hazara Shia miners who were brutally murdered in Quetta? Instead, the optics space in this case was filled by opposition leaders, Maryam Nawaz and Bilawal Bhutto.

Nevertheless, this piece is not about why an optics-obsessed PM such as Khan didn’t immediately occupy the space that was eventually filled by his opponents. It is more about exploring whether Khan really is a populist? For this we will have to first figure out what populism is.

According to the American sociologist, Bart Bonikowski, in the 2019 anthology When Democracy Trumps Populism, populism poses to be ‘anti-establishment’ and ‘anti-elite.’ It can emerge from the right as well as the left, but during its most recent rise in the last decade, it has mostly come up from the right.  

According to Bonikowski, populism of the right has stark ethnic or religious nationalist tendencies. It draws and popularises a certain paradigm of ‘authentic’ racial or religious nationalism and claims that those who do not have the required features to fit in this paradigm are outsiders and, therefore, a threat to the ‘national body.’ It also lashes out against established political forces and state institutions for being ‘elitist,’ ‘corrupt’ and facilitators of pluralism that is usurping the interests of the authentic members of the national body in a bid to undermine the ‘silent majority.’ Populism aspires to represent this silent majority, claiming to empower it.

Simply put, all this, in varying degrees, is at the core of populist regimes that, in the last decade or so, began to take shape in various countries — especially in the US, UK, India, Brazil, Turkey, Philippines, Hungary, Poland, Russia, Czech Republic and Pakistan. Yet, if anti-establishmentarian action and rhetoric is a prominent feature of populism, then what about populist regimes that are not only close to certain powerful state institutions, but were or are actually propped up by them? Opposition parties in Pakistan insist that Imran Khan’s party is propped up by the country’s military establishment, which is aiding it to remain afloat despite it failing on many fronts. The same is the case with the populist regime in Brazil.

Does this mean such regimes are not really populist? No. According to the economist Pranab Bardhan (University of California, Berkeley), even though populists share many similarities, populism’s shape can shift from region to region. Bardhan writes that characteristics of populism are qualitatively different in developed countries from those in developing countries. For example, whereas globalisation is seen in a negative light by populists in Europe and the US, a November 2016 survey published in The Economist shows that the people of 18 developing countries saw it positively, believing it gave their countries’ economies the opportunity to assert themselves.

Secondly, according to Bardhan, survey evidence suggests that much of the support for populist politics in developed countries is coming from less-educated, blue-collar workers, and from the rural backwaters. Populists in developing countries, by contrast, are deriving support mainly from the rising middle classes and the aspirational youth in urban areas. To Bardhan, in India, Pakistan, Turkey, Poland and Russia, symbols of ‘illiberal religious resurgence’ have been used by populist leaders to energise the upwardly-mobile or arriviste social groups.

He also writes that, in developed countries, populism is at loggerheads with the centralising state and political institutions, because it sees them as elitist, detached and a threat to local communities. But in developing countries, the populists have tried to centralise power and weaken local communities. To populists in developing countries, the main villains are not the so-called cold and detached state institutions, but ‘corrupt’ civilian parties. Ironically, while populism in the US is against welfare programmes, such programmes remain important to populists in developing countries.

Keeping this in mind, one can conclude that PM Khan is a populist, quite like his populist contemporaries in other developing countries. Despite nationalist rhetoric and his condemnatory understanding of colonialism, globalisation that promises foreign investment in the country is welcomed. His main base of support remains aspirational and upwardly-mobile urban middle-class segments. He often uses religious symbology and exhibitions of piety to energise this segment, providing religious context to what are actually Western ideas of state, governance, economics and nationalism. For example, the Scandinavian idea of the welfare state that he admires is defined as Riyasat-i-Madina (State of Madina).

Unlike populism in Europe and the US, populism in developing countries embraces the ‘establishment’ and, instead, turns its guns towards established political parties which it describes as being ‘corrupt.’ Khan is no different. He admires the Chinese system of central planning and economy and dreams of a centralised system that would seamlessly merge the military, the bureaucracy and his government into a single ruling whole. His urban middle-class supporters often applaud this ‘vision.’

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.

This virus is ravaging rich countries. What happens when it hits the poor ones?

Horror over the west’s failure to contain Covid-19 will pale by comparison if it sweeps the developing world asks Nesrine Malik in The Guardian 

 

‘The ebola epidemic of 2014 is still fresh in the mind in sub-Saharan African countries.’ A man wears a mask while shopping in Johannesburg. Photograph: Luca Sola/AFP via Getty Images


Though Africa has fewer coronavirus cases and a slower rate of infection than the UK, many countries in the continent have passed dramatically more extreme measures to prevent its spread than Britain has. In my birth country of Sudan, after only one case and one death was registered, all schools and universities were shut down. Several other nations, such as Egypt, have taken the ultimate precaution and closed their airports.

There is no denial here, no mixed messaging, and no unfounded promise of how soon we will send the virus packing.

The tough and timely action is borne less out of political maturity than it is bitter experience, and an awareness that already overburdened public healthcare systems cannot sustain an onslaught. The ebola epidemic of 2014 is still fresh in the mind in sub-Saharan African countries; it was an experience that showed prevention and containment are the only hope of fending off thousands of deaths. 

If we are concerned about the failure to contain the virus in western Europe and the US, multiples of that horror await in the developing world. With few means of medical intervention, and several other risk factors such as malnutrition, high population densities, communal living and lack of access to water and washing facilities, the rates of mortality could dwarf what has been seen so far in the west. And economically, the virus risks ushering in an ice age. There are no war chests, no stimulus packages, no insurance payouts.

There is little data about the impact in Africa of previous pandemics such as the 1918-19 Spanish flu (except from South Africa where, because of troop movements, 6% of the population perished). But we do have the experience of economically similar south Asian countries to go by. It is estimated that up to 30% of the entire fatal toll of the Spanish flu came from a single country, India. And in Africa it appears that the countries that suffered the highest casualties were those most exposed to global flows of people and capital – the ports or thoroughfares for troops on the move, and for sea and land labour.

There is something painfully predictable about how coronavirus was introduced to the continent. Well-off travellers to the rest of the world returned from holidays and business trips carrying the virus, as did infected tourists. In Egypt, the first cases of Covid-19 appear to be linked to one cruise ship, where locals who served the tourists contracted the disease.

The spread of the virus on the continent sits in the crosscurrents of travel and financial flows that expose African countries to the sharp end of globalisation – one where the flow of people is encouraged into the continent for business and tourism, and severely restricted out of the continent even for the wealthy and well connected.

It is the recurring theme of how the pandemic has played out so far. The poor, the uninsured, the disenfranchised, the information-poor and the less mobile are sitting ducks. Many western economies, including the US and the UK, have slowly pushed these people to the margins, while restricting employment benefits such as holiday pay, sick leave, and private insurance to an increasingly exclusive class. One of the reasons the British and US governments have been so slow to provide free testing, medical care and bailouts for those who’ve lost work is that these inequalities are now hardwired into the system. They cannot be undone overnight even when lives depend on it.

The global economy is set up in much the same way, with winners who hoard the spoils, and losers who scratch around for the leftovers. If wealthy single countries cannot scramble to save their own people, there is no hope for any effort to extend help to countries with a fraction of the resources.

But here is the tragic catch for those who think that this structural imbalance is not our problem. In this instance, national and international inequalities cannot persist without everyone losing. The realisation is just beginning to dawn upon lawmakers that the rich cannot be barricaded against the poor, no matter how high the barriers to the fortress are. Limiting the spread of the virus entails ensuring that everyone in the pool, be it local or global, is given the ability to test, self-isolate if need be, and receive treatment. 

Yes, to some extent this is a utopian aspiration. But it is also essentially pragmatic. We cannot extol the virtues of small government and global societies without grasping that the risk to the majority cannot be halted from spreading: viruses do not distinguish between classes and nationalities.

Just as work and public life cannot be shuttered for ever, borders cannot be closed indefinitely. African countries are moving fast against coronavirus, well aware that they are on their own. But barring a miracle, or a pandemic Marshall plan by wealthier countries, if the virus explodes in poorer countries, the cataclysm will engulf everyone.

Let's admit it: Britain is now a developing country

We have iPads and broadband – but also oversubscribed foodbanks. Our economy is no longer zooming along unchallenged in the fast lane, but a clapped-out motor

• 
• • Aditya Chakrabortty
  • The Guardian, Monday 9 December 2013 20.00 GMT

A foodbank in the Black Country. Photograph: David Jones/PA

Elite economic debate boils down to this: a man in a tie stands at a dispatch box and reads out some numbers for the years ahead, along with a few micro-measures he'll take to improve those projections. His opposite number scoffs at the forecasts and promises his tweaks would be far superior. For a few hours, perhaps even a couple of days, afterwards, commentators discuss What It All Means. Last Thursday's autumn statement from George Osborne was merely the latest enactment of this twice-yearly ritual, and I bet you've already forgotten it.

Compare his forecasts and fossicking with our fundamental problems. Start with last week's Pisa educational yardsticks, which show British teenagers trailing their Vietnamese counterparts at science, and behind the Macanese at maths. Or look at this year's World Economic Forum (WEF) competitiveness survey of 148 countries, which ranks British roads below Chile's, and our ground-transport system worse than that of Barbados.

Whether Blair or Brown or Cameron, successive prime ministers and their chancellors pretend that progress is largely a matter of trims and tweaks – of capping business rates and funding the A14 to Felixstowe. Yet those Treasury supplementary tables and fan charts are no match for the mass of inconvenient facts provided by the Organisation for Economic Co-operation and Development, the WEF or simply by going for a wander. Sift through the evidence and a different picture emerges: Britain's economy is no longer zooming along unchallenged in the fast lane, but an increasingly clapped-out motor regularly overtaken by Asian Tigers such as South Korea and Taiwan.

Gender equality? The WEF ranks us behind Nicaragua and Lesotho. Investment by business? The Economist thinks we are struggling to keep up with Mali.

Let me put it more broadly, Britain is a rich country accruing many of the stereotypical bad habits of a developing country.

I began thinking about this last week, while reporting on graphene, the wonder material discovered by Manchester scientists and held up by cabinet ministers as part of our new high-tech future. Graphene is also the point at which Treasury dreaminess is harshly interrupted by the reality of our national de-development.

Briefly, the story goes like this: Osborne funnelled a few tens of millions into research on the substance. It's the kind of public-sector kickstart that might work in a manufacturing economy such as Germany – but which in Britain, with its hollowed-out industry and busted supply chains, has proved the equivalent of pouring money down a hole. One university physicist described how this was part of a familiar pattern of generating innovations for the rest of the world to capitalise on, then sighed: "One day, we'll stop thinking of ourselves as a major economic power, and realise we're more like South Korea in the early 60s." South Korea, by way of comparison, has already put in over 20 times as many graphene patents as the country that discovered it.

How can any nation that came up with the BBC and the NHS be considered in the same breath as India or China? Let me refer you to one of the first lines of The Great Indian Novel by Shashi Tharoor, in which a wise old man warns International Monetary Fund officials and foreign dignatories: "India is not, as people keep calling it, an underdeveloped country, but rather, in the context of its history and cultural heritage, a highly developed one in an advanced state of decay."

Stop thinking of development as a process that only goes in one direction, or which affects a nation's people equally, and it becomes much easier to see how Britain is going backwards.

Even banana republics have cash: it just ends up in the hands of a very few people – ask the bank managers of Switzerland or the hotel concierges of Paris. In Britain, we have become used to having our resources skimmed off by a small cadre of the international elite, who often don't feel obliged to leave much behind for our tax officials. An Africa specialist could look at the City and recognise in it a 21st-century version of a resource curse: something generating oodles of money for a tiny group of people, often foreign, yet whose demands distort the rest of the economy. Sure, Britain has iPads and broadband – but it also has oversubscribed foodbanks. And the concept of the working poor that has dominated political debate since the crash is also something straight out of development textbooks.

Nobel laureate Amartya Sen defined development as "the removal of various types of unfreedoms that leave people with little choice and little opportunity of exercising their reasoned agency". Yet when it comes to social mobility, Britain now has the worst record of all advanced countries – and will soon be overtaken by the newly rich countries of east Asia.

And it's when wealth is concentrated in too few hands that the forces of law and order get used as a militia for the elite – and peaceful dissent gets stamped upon. That's why police are now a presence on our business-friendly university campuses; it also explains why Theresa May had the front to try to deport Trenton Oldfield for disrupting a student rowing competition (sorry, the Boat Race).

This isn't a sub-Rhodesian moan about Britain going to the dogs. But as my colleague Larry Elliott said in his most recent book, Going South, the sooner we puncture our own complacency at having created a rich economy for the few, and think of ourselves as in dire need of a proper economic development plan, the better.

Otherwise, we're well set to corner the world market in pig semen. The United Kingdom of spoink.

Africa's natural resources can be a blessing, not an economic curse

Resource-rich countries have, on average, done poorly but progress is possible if they get economic and political support

People in countries rich in natural resources, such as Tanzania, pictured, can benefit if given the right political and economic support. Photograph: Remi Benali/Corbis

Joseph Stiglitz in The Guardian

New discoveries of natural resources in several African countries – including Ghana, Uganda, Tanzania and Mozambique – raise an important question: will these windfalls be a blessing that brings prosperity and hope, or a political and economic curse, as has been the case in so many countries?

On average, resource-rich countries have done even more poorly than countries without resources. They have grown more slowly, and with greater inequality – just the opposite of what one would expect. After all, taxing natural resources at high rates will not cause them to disappear, which means that countries whose major source of revenue is natural resources can use them to finance education, healthcare, development and redistribution.

A large literature in economics and political science has developed to explain this "resource curse", and civil-society groups (such as Revenue Watch and the Extractive Industries Transparency Initiative) have been established to try to counter it. Three of the curse's economic ingredients are well-known:

• Resource-rich countries tend to have strong currencies, which impede other exports

• Because resource extraction often entails little job creation, unemployment rises

• Volatile resource prices cause growth to be unstable, aided by international banks that rush in when commodity prices are high and rush out in the downturns (reflecting the time-honoured principle that bankers lend only to those who do not need their money).

Moreover, resource-rich countries often do not pursue sustainable growth strategies. They fail to recognise that if they do not reinvest their resource wealth into productive investments above ground, they are actually becoming poorer. Political dysfunction exacerbates the problem, as conflict over access to resource rents gives rise to corrupt and undemocratic governments.

There are well-known antidotes to each of these problems: a low exchange rate, a stabilisation fund, careful investment of resource revenues (including in the country's people), a ban on borrowing, and transparency (so citizens can at least see the money coming in and going out). But there is a growing consensus that these measures, while necessary, are insufficient. Newly enriched countries need to take several more steps in order to increase the likelihood of a "resource blessing".

First, these countries must do more to ensure that their citizens get the full value of the resources. There is an unavoidable conflict of interest between (usually foreign) natural-resource companies and host countries: the former want to minimise what they pay, while the latter need to maximise it. Well-designed, competitive, transparent auctions can generate much more revenue than sweetheart deals. Contracts, too, should be transparent, and should ensure that if prices soar – as they have repeatedly – the windfall gain does not go only to the company.

Unfortunately, many countries have already signed bad contracts that give a disproportionate share of the resources' value to private foreign companies. But there is a simple answer: renegotiate; if that is impossible, impose a windfall-profit tax.

All over the world, countries have been doing this. Of course, natural-resource companies will push back, emphasise the sanctity of contracts, and threaten to leave. But the outcome is typically otherwise. A fair renegotiation can be the basis of a better long-term relationship.

Botswana's renegotiations of such contracts laid the foundations of its remarkable growth for the last four decades. Moreover, it is not only developing countries, such as Bolivia and Venezuela, that renegotiate; developed countries such as Israel and Australia have done so as well. Even the United States has imposed a windfall-profits tax.

Equally important, the money gained through natural resources must be used to promote development. The old colonial powers regarded Africa simply as a place from which to extract resources. Some of the new purchasers have a similar attitude.

Infrastructure (roads, railroads, and ports) has been built with one goal in mind: getting the resources out of the country at as low a price as possible, with no effort to process the resources in the country, let alone to develop local industries based on them.

Real development requires exploring all possible linkages: training local workers, developing small- and medium-size enterprises to provide inputs for mining operations and oil and gas companies, domestic processing, and integrating the natural resources into the country's economic structure. Of course, today, these countries may not have a comparative advantage in many of these activities, and some will argue that countries should stick to their strengths. From this perspective, these countries' comparative advantage is having other countries exploit their resources.

That is wrong. What matters is dynamic comparative advantage, or comparative advantage in the long run, which can be shaped. Forty years ago, South Korea had a comparative advantage in growing rice. Had it stuck to that strength, it would not be the industrial giant that it is today. It might be the world's most efficient rice grower, but it would still be poor.

Companies will tell Ghana, Uganda, Tanzania, and Mozambique to act quickly, but there is good reason for them to move more deliberately. The resources will not disappear, and commodity prices have been rising. In the meantime, these countries can put in place the institutions, policies, and laws needed to ensure that the resources benefit all of their citizens.

Resources should be a blessing, not a curse. They can be, but it will not happen on its own. And it will not happen easily.

The DEVELOPMENT Deception

By Brendan P O'Reilly

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.

"At present, we are stealing the future, selling it in the present, and calling it GDP."
- Paul Hawken

There is a dangerous lie that permeates the media, government and general discourse of nearly every single nation on Earth.

That lie is the Development Deception. This myth is based on three concepts. First is the distinction between the developed nations (North America, Western Europe, Australia, New Zealand, South Korea, and Japan), and the Developing Nations (everywhere else).

The second idea is that "developing" countries can become "developed" through improved education, stable governance, and opening their markets to trade and investment. The third leg of this Deception is that such a transformation is not only possible, but also desirable.

The metric used to distinguish "developed" nations from "developing" nations is gross domestic product (GDP) per capita. Poor nations aspire to reach a certain economic level to become so-called "developed nations". The Myth of Development has four fundamental inter-related flaws. The first one is the problem of the Gray Area.

The gap between "developed" and "developing" countries is presented as a simple black-and-white dichotomy. I often hear from my Chinese students say, "China is a developing country. America is a developed country. We want to become a developed country."

Fair enough. But which country has high-speed trains? Which country has a higher unemployment rate? How can the government of a "developed" country owe trillions of dollars to a "developing" country?

Obviously many nations in Asia and Africa, and Latin America have very serious structural problems, which could be alleviated through stable government and educational reform. Very poor countries should aspire to create social and economic institutions that allow their people to live with dignity. Nevertheless the rise of new economic powers such as Brazil, India, and (especially) China, coupled with the massive financial difficulties faced by Europe, Japan, and the United States, call into question the utility of the developed/developing dichotomy.

The second problem with the Myth of Development is philosophical. The very term "development" implies a steady linear progression from poverty and ignorance to wealth, literacy, and general happiness. This viewpoint is Western in origin, and alien to many of the world’s cultures.

The idea of the inexorable march of progress has roots in the Judeo-Christian worldview of time (God creates the world, the world exists, the world ends), and has been largely co-opted by modern science. We are told to believe that progress is inevitable, that the quality of life for each new generation will be better than the life of their parents. Never mind the fact that humanity has created weapons that empower a handful of political leaders to destroy civilization itself.

Never mind obesity is now challenging starvation as a cause of premature death. Of course, the advances made in the last century in curing diseases, increasing literacy rates, and fighting hunger must be lauded. However, to blindly value "progress" above all else threatens our very survival as a species.

The third problem with the Development Deception stems from definitions. As mentioned previously, GDP per capita is the standard the yardstick for measuring development. This assessment ignores serious social difficulties faced by the so-called developed nations.

For example, a third of the adult population of the United States of America, the archetype "developed" nation, suffer from obesity, with another third classified as overweight. The United States of America also has the dubious distinction of having the highest incarceration rate of any nation on Earth.

Meanwhile Japan, the paragon of "development" in Asia, has one of the lowest fertility rates in the world, leading to a rapidly aging population. This trend, unless dramatically reversed, will exacerbate Japan’s social, economic, and political crisis, as more retirees put enormous strain on the working population. Japan’s population is set to shrink by roughly thirty million over the next four decades (Citation here). Are these worthy goals for the so-called "developing" nations to aspire to?

The fourth and final problem with the Myth of Development is a terminal defect. Citizens in countries such as China and India are encouraged to join the middle class and live "Western" lifestyles. As benign as it sounds, this goal is completely impossible. Simply put, there are not enough natural resources on this planet to sustain such an increase in consumption.

According to World Bank figures, in 2008 Americans, on average, used 87,216 kilowatt hours of electricity. The average Chinese used 18,608 kilowatt hours, and the average Indian 6,280. All three countries depend primarily on coal for electricity. To bridge the gap between these levels of resource utilization of would entail environmental catastrophe and global shortages on an unimaginable scale. Coal is just one example - one could also look at oil, lumber, or meat consumption. Indeed, many of the fundamental challenges facing the world economic system - such as rising food and fuel costs - are directly related to economic development.

The Development Deception is perpetuated by international corporations and national governments. Resource mining, production, and overconsumption are the basis for the current globalized economic system. Human beings are classified as "consumers", because overconsumption entails short-term profit.

Rich nations leverage their "developed" status to influence poorer nations, while the governments of these poor nations use the promise of development to maintain political power. None of this propaganda changes the fact that it is grossly misleading for the nations who over-consume the Earth’s finite resources to be considered developed.

Advocates of The Development Myth may point to science as a savior. We are constantly told that new inventions will allow for more efficient use of resources, or allow for sustainable consumption patterns. This argument provides only false hope. We cannot speculate our way out of environmental pollution and a collapsing natural resource base. Unless and until new "green" technology actually exists and is utilized, science is actually exacerbating ecological disaster.

Recently, the Human Development Index (HDI) has been promoted as a more "human-centered" alternative to GDP as a metric for measuring development. HDI uses data on life expectancy, literacy, number of years in school, and GDP to determine the development status of a country. Although this presents a useful alterative, the continued use of GDP as a basis for measuring development is HDI’s fundamental flaw. Unsustainable consumption of finite resources cannot reasonably be classified as "development".

What is the viable alternative to the Development Myth? Bhutan has advocated Gross National Happiness as an alternative goal to increasing GDP per capita. Citizens are asked about their Subjective Well Being in order to establish Gross National Happiness. Obviously this measurement is difficult to define and numerate, and ignores problems such as illiteracy and extreme poverty. However, it does point in the right direction.

Development needs to be redefined in order to account for human physical and emotional well-being as well as environmental sustainability. Otherwise it is only a lie, and a dangerous one at that. To seek economic advance at the expense of human interests and future generations is a recipe for global disaster.

When extreme wealth is challenging extreme poverty as the bane of human existence, a revolution of values is needed. We as a species must advance values of conservation, and teach people to live within the means of the productive capacity of our planet. No longer can the scramble for nonrenewable resources be viewed as a zero-sum game. Human beings need to develop solidarity on a global scale. Citizens of wealthy nations must learn to live with less.

The most important development is that of the individual. Social and spiritual harmony is the antidote to the Development Deception, for all traditions encourage compassion and warn of the destructive power of greed. To quote LaoZi (as translated by D C Lau):

There is no crime greater than having too many desires;
There is no disaster greater than not being content;
There is no misfortune greater than being covetous.
Hence in being content, one will always have enough.

Brendan P O'Reilly is a China-based writer and educator from Seattle. He is author of The Transcendent Harmony.