Bangladesh goes to IMF. How deep is its crisis, comparison with Sri Lanka, Pakistan & India?

 

Message from Sri Lanka

Jawed Naqvi in The Dawn

ONE can see a few instructive lessons from the painful turbulence underway in Sri Lanka. The most crucial of these for neighbours and beyond is the resounding message that there are limits to socially divisive policies any government or state can pursue, particularly to mask the distress brought about by bad economic prescriptions. In other words, sooner or later people catch on.

The jostling is already on between narratives about the crisis. The dominant narrative about an economic collapse as the trigger for mass protests is a tautology. Another perspective, inevitably, is focusing on the ousted Rajapaksa government’s refusal to vote with the US against Russia over Ukraine. The last-minute call to Vladimir Putin for help, chiefly with oil, will be interpreted in myriad ways.

There will be comments also about the need for the IMF to fix things urgently. The problem is this had happened to India when the Gulf War induced economic instability with oil prices nudging a veteran pro-Soviet India into becoming a darling of the West. The prescription the IMF gave Manmohan Singh required secrecy. It had to be kept away from parliamentary scrutiny. The Ayodhya movement of L.K. Advani was activated to occupy the nation’s attention, away from the IMF-induced pain that inevitably comes with its trickle-down economic advisory.

Be that as it may, Ranil Wickremesinghe looks the man of the moment for the US. Never mind that he lost the last election when his party couldn’t win a single seat. He came into parliament through the backdoor, the national list.

Would that work for the purpose of evicting China from its perch in Colombo? If the Western purpose falters, there could be worse awaiting the hapless country. So, here we are. The president who courted China’s economic worldview and refused to vote against Russia has fled. (Remember Kyiv in 2014?) And Wickremesinghe, nephew of Sri Lanka’s first pro-US president J.R. Jayewardene, has taken charge, and is threatening to quell the protests by force if necessary.

There’s always a backup script if things go wrong. The ousted president was a close ally of the Bodu Bala Sena. The Sinhalese chauvinist group has cast itself in the image of India’s RSS, a Muslim and Christian-hating Buddhist clone of the Hindutva order. Other similarities between India and Sri Lanka are eerier. Remember how prime minister Solomon Bandaranaike was assassinated by a Buddhist monk angered by his quest for a friendly pact with the minority Tamils? The murder bore an uncanny resemblance to Gandhi’s assassination by Hindu supremacists hostile to his alleged appeasement of Muslims. 

Certain things about Sri Lanka’s heart-wrenching mess one can do little about, among them being the fact that Covid-19 waylaid the tourism industry, the island nation’s economic backbone. Small-scale entrepreneurs, critically the garment exporters, took a hit. The resultant cap on foreign imports coupled with an outlandish nationwide move to switch to organic farming, (mainly to mask the slashing of fertiliser imports) wrecked the prospects of an early recovery from pandemic-induced setbacks. The horror could strike Sri Lanka whose human development indices are far ahead of its neighbours.

Decades before Gen Musharraf sealed his military support against the Tamil Tigers, India and Sri Lanka bonded as close friends. Former president Chandrika Kumaratunga particularly treasures an old picture of Nehru hoisting her in the air. Later Indira Gandhi stopped Sirimavo Bandaranaike from quitting during a Sinhalese communist insurrection in 1971, the year Mrs Gandhi would go to war with Pakistan. “Indu called me to say under no circumstances was I to resign.” The Janatha Vimukthi Peramuna insurrection would have rattled any government. It was the first of two unsuccessful armed revolts conducted by the communist group against the socialist United Front Government of Sri Lanka. The revolt lasted two months before Indian troops helped quell it.

I met Mrs Bandarnaike when she was in the wheelchair with paralysed toes. It was a peep into the India-Sri Lanka backstage. Her son Anura Bandaranaike was a devotee of India’s healer-guru Sai Baba of Pattapurthi. On his advice, the mother flew to Puttaparthi. The Sai Baba promised quick recovery but it was a tall claim. The Buddhist press was up in arms over the leader of their country falling prey to the ‘mumbo jumbo’ of an Indian guru.

It didn’t help that India was firmly in the Soviet camp while its neighbours had cosy ties with China and the US, both allies against Moscow. Pakistan, Bangladesh, Nepal and Sri Lanka led the movement for Saarc, the South Asian club that met in Dhaka for the first summit in 1985. Gen Ershad, its host, would later tell me that it was a collective effort by India’s neighbours to deal with Delhi jointly. “We were allergic to India,” Ershad told me bluntly in a TV interview. “So we decided to deal with India jointly.”

Sri Lanka is in a serious quandary today and does not have the emotional wherewithal to deal with the IMF’s conditionality that always comes. The protesters represent Sri Lanka’s multicultural bouquet. There’s just no room for dividing them again. Nor is there stomach for more IMF pills.

Palitha Kohona, Sri Lanka’s ambassador in Beijing shared the fears with the Global Times. The patience is running thin.

“In some cases, it’s difficult because the belt is already on the last notch. Sri Lanka has a state-funded healthcare system from birth to death. Some are worried that the IMF might recommend that we tighten the healthcare system. Our education system is also free from grade one to university level. This might be another area that the IMF might recommend pruning. But these may add to the unrest, which is already hampering the recovery of the country and unsettle any government, which takes over in the next few weeks. We have to deal with these issues, and it’s not going to be easy for Sri Lanka.”

A wave of unrest is coming

Soaring food and fuel prices are adding to pre-existing grievances writes The Economist


  


Jesus said that man does not live by bread alone. Nonetheless, its scarcity makes people furious. The last time the world suffered a food-price shock like today’s, it helped set off the Arab spring, a wave of uprisings that ousted four presidents and led to horrific civil wars in Syria and Libya. Unfortunately, Vladimir Putin’s invasion of Ukraine has upended the markets for grain and energy once again. And so unrest is inevitable this year, too. 

Soaring food and fuel prices are the most excruciating form of inflation. If the prices of furniture or smartphones rise, people can delay a purchase or forgo it. But they cannot stop eating. Likewise, transport costs are baked into every physical good, and most people cannot easily walk to work. So when food and fuel grow dearer, standards of living tend to fall abruptly. The pain is most intense for city dwellers in poor countries, who spend a huge part of their income on bread and bus fares. Unlike rural folk, they cannot grow their own crops—but they can riot.

Many governments want to ease the pain, but are indebted and short of cash after covid-19. The average poor country’s public debt-to-gdp ratio is nearly 70% and it is climbing. Poor countries also pay higher interest rates, which are rising. Some of them will find this unsustainable. The imf says that 41 are in “debt distress” or at high risk of it.

Sri Lanka has already defaulted and melted down. Angry and hungry mobs have set fire to vehicles, invaded government buildings and spurred their reviled president into pushing out the prime minister, who is his brother. Riots have erupted in Peru over living standards, and India over a plan to cut some jobs-for-life in the army, which rankles when so many yearn for security. Pakistan is urging its citizens to drink less tea to save hard currency. Laos is on the brink of default. Anger at the cost of living doubtless contributed to Colombia’s election of a left-wing radical as president on June 19th.

The Economist has built a statistical model to examine the relationship between food- and fuel-price inflation and political unrest. It reveals that both have historically been good predictors of mass protests, riots and political violence. If our model’s findings continue to hold true, many countries can expect to see a doubling of unrest this year .

The greatest risk is in places that were already precarious: countries such as Jordan and Egypt that depend on food and fuel imports and have rickety public finances. Many such places are badly or oppressively governed. In Turkey the supply shock has accelerated ruinous inflation caused by dotty monetary policy. Around the world, the cost-of-living squeeze is adding to people’s grievances and raising the chance that they will take to the streets. This is more likely to turn violent in places with lots of underemployed, single young men. As their purchasing power falls, many will conclude that they will never be able to afford to marry and have a family. Frustrated and humiliated, some will feel they have nothing to lose if they join a riot.

Another way inflation destabilises societies is by fostering graft. When wages do not keep up with prices, officials with needy relatives find it even more tempting to extort money from the powerless. This infuriates those who are preyed on. Recall that the trigger for the Arab spring was the suicide of a Tunisian hawker, who set himself ablaze to protest against constant demands for pay-offs from dirty cops.

If unrest spreads this year, it could add to the economic pain. Investors dislike riots and revolutions. One study finds that a big outbreak of political violence typically knocks a percentage point off gdp 18 months later. The damage is worse when protesters are angry about both politics and the economy combined.

Averting the coming explosions will be hard. A good start would be to scrap policies that discourage food production, such as price controls and export curbs. Farmers in countries like Tunisia leave fertile land unploughed because they have to sell their crop to the state for a pittance. Governments should let farmers reap what they sow. Also, far less grain should be wastefully burned as biofuel.

Several countries are asking for bail-outs. International financial institutions must strike a tricky balance. Saying no could spell chaos—and do lasting harm. But so could bailing out woeful governments, by entrenching bad and unsustainable policies. Bodies such as the imf, whose negotiators arrived in Sri Lanka and Tunisia this week, should be generous but insist on reforms. They should continue to monitor carefully how their money is spent. And they should act swiftly. The longer all this anger is allowed to fester, the more likely it is to explode.

Stunted imagination - Is there no alternative to Pakistan joining the IMF program?

Aasim Sajjad Akhtar in The Dawn

FOR weeks extending into months, Pakistan’s intellectual and political mainstream has insisted that there is no option but to revive the IMF loan programme. The frank admission made by members of the treasury benches in parliament that this is an ‘IMF budget’ that the country had to take on simply confirms what is purportedly unchallenged common sense: there is no alternative (TINA).

The acronym TINA came into widespread circulation in the late 1990s when virtually one-size-fits-all IMF- and World Bank-dictated economic policies were foisted upon much of Latin America, Africa and Asia. Until the end of the Cold War, the state acted at least to some extent in favour of labour by regulating capital, but generations that have come of age after the mid-1990s have been made to believe that there is now only one workable economic model — neoliberalism.

Make no mistake: TINA was a concerted ideological project that continues to this day, despite the fact that neoliberal economic fantasies peddled by a globalised class of profiteers and states have deepened inequality, led to dispossession of working masses from jobs, housing and life itself, and wreaked havoc on the natural environment.

TINA is based around the fact that we do not export enough to cover our imports, while our revenues are perpetually less than our expenditures, and so we need loans to get by. Insofar as ‘structural reform’ entails increasing our exports, global creditors like the IMF ‘encourage’ local producers to become outsourcing partners of MNCs by treating workers like serfs. When it comes to reducing expenditures, they never flinch when our oligarchic rulers slash pro-poor subsidies, health, education and other social sector spending.

By the TINA metric, the US should take more IMF loans and adopt conditionalities than any other country. In 2021 alone, the US fiscal deficit was almost $3 trillion. But Washington will never go to the IMF and beg for loans and then take on policy conditionalities accordingly because the dollar is the world’s reserve currency and the rest of us fund its deficit. In short, ‘structural reform’ is essentially a rinse-and-repeat political slogan that serves the interests of global investors, firms and the most powerful states.

TINA fiction continues to thrive in Pakistan because our political and economic imagination has been stunted by ‘experts’ who claim to be acting on the basis of ‘objective’ economic facts which, in fact, are largely ideological. None of the explicitly political players in this nauseatingly repetitive story is interested in putting the brakes on unrestrained capital accumulation and the pillage of what remains of the commons.

In our case, all parties who have held the reins of government in recent times, and of course their khaki patrons, prefer to engage in blame games against one another rather than offer substantive visions of an alternative economic order.

The IMF pretends to be politically uninterested and offer what it claims only to be ‘technocratic’ solutions. All donors — including the Chinese whose ‘Beijing Consensus’ is often described as a direct challenge to the ‘Washington Consensus’ — demand ‘structural reforms’ to suit them whilst claiming they have no political interests of their own.

Progressive movements in Latin America offer a clear counterfactual: there are meaningful alternatives to neoliberal orthodoxy that can repeal at least some of the privileges of financial oligarchs and state elites and thus meet the needs of the mass of people, whilst also making some concessions to future generations. Even in North America and Western Europe, where progressive discourses have made a comeback, TINA slogans are increasingly passé and redistribution is back on the agenda.

Yet Western states and multilateral donors continue to outsource neoliberal orthodoxy to Asia and Africa, even as the contradictions of our prevailing political-economic order become acute. We are supposed not to link the growing intensity of earthquakes, forest fires, cyclones and floods to the no-holds-barred accumulation regime that links domestic and global profiteers alike.

We are supposed not to ask too many difficult questions about the hundreds of millions of pounds that have been given back to real estate moguls like Malik Riaz through the collusion of Pakistani and Western officialdom. We are supposed to take for granted that only Russian oligarchs are bad, while all others are to be cheered on in the interests of ‘nation’ and its ‘development’.

News that the IMF programme was being restored was swiftly followed by Chinese and Saudi guarantees. Is this cause for celebration? Our ruling class, khakis at the helm, do not want young people to imagine politics as anything more than dole-outs, profiteering and hateful rhetoric. But the unbridled power of oligarchs, home and abroad, will not remain unchallenged forever.

FATF is linked with Situation in Kashmir, IMF loan is linked with Pak Army Expenditures - HamidBashani

 

Ukrainians pay the price for America's drive to remove Putin

 

Pakistan to surrender Economic Sovereignty?

 

Pakistan’s economic crisis & desperate hunt for costly loans laced with humiliation

 

IMF chief: how the world can make the most of new special drawing rights

Kristalina Georgieva  in The FT 

On Monday, IMF member countries start receiving their shares of the new $650bn special drawing rights allocation — the largest in the fund’s history. This injection of fresh international reserve assets marks a milestone in our collective ability to combat an unprecedented crisis. 

In 2009, during the global financial crisis, a $250bn SDR allocation helped to restore market confidence. This time around, as the world continues to grapple with the Covid-19 pandemic, SDRs are even more important. The additional liquidity will bolster confidence and global economic resilience. 

SDRs can help countries with weak reserves reduce their reliance on more expensive domestic or external debt. And for states hard pressed to increase social spending, invest in recovery and deal with climate threats, they offer a precious additional resource. 

It is crucial, however, that these SDRs are used as effectively as possible — with accountability and transparency, and with as much as possible going to countries most in need. 

So how can we make the most of the new allocation? 

First, by making SDRs available to member countries quickly. With SDRs distributed in proportion to IMF quota shares, closely related to a country’s economic size, about $275bn is going to emerging and developing countries. Low-income countries are receiving about $21bn — over 6 per cent of gross domestic product in some cases. 

Vulnerable countries will be able to use the new SDRs to support their economies and step up the fight against the virus and its variants. Combined with grants and other essential support from the international community, this will help achieve the goal of vaccinating at least 40 per cent of the population in every country by the end of 2021, and at least 60 per cent by the first half of 2022. 

Second, every effort should be made to ensure SDRs are used for the benefit of member countries and the global economy. The decision on how best to utilise them rests with member countries of the IMF. They can hold them as part of their official reserves, or use them by converting them into US dollars, euros or other reserve currencies. 

But while this is a sovereign decision, it must be prudent and well-informed. The fund will work with its members to help ensure accountability and transparency. 

We are providing a framework for assessing the macroeconomic implications of the new allocation, its statistical treatment and governance, and how it might affect debt sustainability. The fund will provide regular updates on all SDR transactions, plus a follow-up report on their use in two years’ time. 

Third, with increasingly divergent economic fortunes due to the pandemic, we need to go further to ensure more SDRs go to those who need them most. That is why the IMF is encouraging voluntary channelling of SDRs from countries with strong external positions to the poorest and most vulnerable nations. 

By magnifying the impact of the new allocation, redirecting SDRs could help those most in need, while reducing the risk of social and economic instability that could affect us all. 

The good news is that we can build on progress achieved so far. Over the past 16 months, some better off member countries have pledged to lend a total of $24bn, including $15bn from existing SDRs, to the IMF’s Poverty Reduction and Growth Trust, which provides concessional loans to low-income countries. We hope to see further support to the PRGT from the new SDRs. 

The IMF is also engaging with its members on a possible new Resilience and Sustainability Trust that could use SDRs to help poor and vulnerable countries with structural transformation, including climate-related challenges. Another possibility could be channelling SDRs to support lending by multilateral development banks. 

Of course, SDRs are not a silver bullet. They must be part of a broader programme of collective action by countries and international institutions. Since the pandemic began, the IMF has played its part, providing about $117bn in new IMF financing to 85 countries — and debt service relief to 29 low-income nations. The fund also joined forces with the World Bank, World Health Organization and World Trade Organization to promote the urgent task of vaccinating the world. 

The poet Robert Frost wrote of the “road not taken”. We now have a unique opportunity to take the right road as the world strives for a more resilient future. We at the IMF pledge to do our best to ensure that this historic SDR allocation, used wisely, plays its part in promoting a strong and sustainable global recovery.

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.

The G20 should be leading the world out of the coronavirus crisis – but it's gone AWOL

In March it promised to support countries in need. Since then, virtual silence. Yet this pandemic requires bold, united leadership writes Gordon Brown in The Guardian

 

The G20’s video conference meeting in Brasilia on 26 March 26. Photograph: Marcos Correa/Brazilian Presidency/AFP via Getty Images


If coronavirus crosses all boundaries, so too must the war to vanquish it. But the G20, which calls itself the world’s premier international forum for international economic cooperation and should be at the centre of waging that war, has gone awol – absent without lending – with no plan to convene, online or otherwise, at any point in the next six months.

This is not just an abdication of responsibility; it is, potentially, a death sentence for the world’s poorest people, whose healthcare requires international aid and who the richest countries depend on to prevent a second wave of the disease hitting our shores.

On 26 March, just as the full force of the pandemic was becoming clear, the G20 promised “to use all available policy tools” to support countries in need. There would be a “swift implementation” of an emergency response, it said, and its efforts would be “amplified” over the coming weeks. As the International Monetary Fund (IMF) said at the time, emerging markets and developing nations needed at least $2.5tn (£2,000bn) in support. But with new Covid-19 cases round the world running above 100,000 a day and still to peak, the vacuum left by G20 inactivity means that allocations from the IMF and the World Bank to poorer countries will remain a fraction of what is required.

And yet the economic disruption, and the decline in hours worked across the world, is now equivalent to the loss of more than 300 million full-time jobs, according to the International Labour Organization. For the first time this century, global poverty is rising, and three decades of improving living standards are now in reverse. An additional 420 million more people will fall into extreme poverty and, according to the World Food Programme, 265 million face malnutrition. Developing economies and emerging markets have none of the fiscal room for manoeuvre that richer countries enjoy, and not surprisingly more than 100 such countries have applied to the IMF for emergency support.

The G20’s failure to meet is all the more disgraceful because the global response to Covid-19 should this month be moving from its first phase, the rescue operation, to its second, a comprehensive recovery plan – and at its heart there should be a globally coordinated stimulus with an agreed global growth plan.

To make this recovery sustainable the “green new deal” needs to go global; and to help pay for it, a coordinated blitz is required on the estimated $7.4tn hidden untaxed in offshore havens.

As a group of 200 former leaders state in today’s letter to the G20, the poorest countries need international aid within days, not weeks or months. Debt relief is the quickest way of releasing resources. Until now, sub-Saharan Africa has been spending more on debt repayments than on health. The $80bn owed by the 76 poorest nations should be waived until at least December 2021.

But poor countries also need direct cash support. The IMF should dip into its $35bn reserves, and the development banks should announce they are prepared to raise additional money.

A second trillion can be raised by issuing – as we did in the global financial crisis – new international money (known as special drawing rights), which can be converted into dollars or local currency. To their credit, European countries like the UK, France and Germany have already lent some of this money to poorer countries and, if the IMF agreed, $500bn could be issued immediately and $500bn more by 2022.

And we must declare now that any new vaccine and cure will be made freely available to all who need it – and resist US pressure by supporting the World Health Organization in its efforts to ensure the poorest nations do not lose out. This Thursday, at the pledging conference held for the global vaccine alliance in London, donor countries should contribute the $7bn needed to help make immunisation more widely available.

No country can eliminate infectious diseases unless all countries do so. And it is because we cannot deal with the health nor the economic emergency without bringing the whole world together that Donald Trump’s latest counterproposal – to parade a few favoured leaders in Washington in September – is no substitute for a G20 summit.

His event would exclude Africa, the Middle East, Latin America and most of Asia, and would represent only 2 billion of the world’s 7 billion people. Yet the lesson of history is that, at key moments of crisis, we require bold, united leadership, and to resist initiatives that will be seen as “divide and rule”.

So, it is time for the other 19 G20 members to demand an early summit, and avert what would be the greatest global social and economic policy failure of our generation.

Pakistan, IMF and the Small Print

Najam Sethi in The Friday Times



Finally, after flip-flopping for nine months, the PTI government has signed on the dotted line with the IMF. It has also revived the PMLN’s tax amnesty scheme that it once lambasted as “a national security threat”. In the bargain, it has ditched the finance minister, Asad Umar, and the Governor of the State Bank of Pakistan, Tariq Bajwa. Both gentlemen seemed to be overly concerned about protecting Pakistan’s interests, while their boss, Prime Minister Imran Khan, was ready to throw in the towel. Peeved, Mr Umar is threatening to reveal details of his disenchantment with the IMF.

To be honest, though, there’s no point in haggling when you don’t have a leg to stand on. Without the IMF’s financial assistance, we will default on our external payments and be declared bankrupt. Without an extra injection of funds from the Tax Amnesty Scheme, we will have to cut back on defense or development expenditures, which we can ill-afford.

The “deal” with the IMF is subject to certain tough conditions. First, we must get the green light from FATF. As we speak, Pakistani officials are negotiating compliance before the Asia Pacific Group of FATF chaired by India. A lot of homework has been done. But this will be an on-going review process. If there are terrorist attacks in India whose footprints can be traced to Pakistan, the FATF file on Pakistan will be opened again.

Second, the IMF wants Pakistan to roll over its debts to China, Saudi Arabia and the UAE so that the burden of debt payments can be staggered over time. So Prime Minister Khan will have to pick up the begging bowl and grovel in faraway capitals all over again.

Third, the provinces will have to be pressured to accept a cut in their constitutional share of federal revenues so that IMF targets of the primary deficit can be met. While PTI governments in three provinces may be expected to roll over and play dead, Sindh will scream. But NAB can be leveraged to silence it.

Fourth, the IMF wants to “facilitate trade”. This will mean an end to export subsidies and restraint on increasing import duties. In other words, trading volumes will be determined exclusively by the exchange rate.

Fifth, the exchange rate will float freely so that the SBP doesn’t deplete its reserves by selling forex in the market in order to prop up the rupee. In other words, there will be continuing devaluation and rising inflation.

Sixth, the IMF wants to encourage spending on development and poverty alleviation. With given debt payments, that will lead to pressure on defense expenditures. Can we expect the brass to receive this with equanimity?

Last, but most important, it is an established fact that Washington leverages the IMF, World Back, Asian Development Bank and other international financial institutions through the US Treasury to achieve its foreign policy goals. Should Pakistan fail to deliver on US objectives in Afghanistan and India – a difficult task – we may expect these institutions to get tougher on future installments of funds.

The PTI Tax Amnesty Scheme is not dissimilar to the PMLN scheme that fetched less than Rs 100 Billion. But with the economy headed into a deeper trough, even that amount seems far-fetched. Some wisdom has therefore prevailed in allowing tax payable to be determined in the next six weeks but payment made over the course of the next twelve months, albeit with some surcharge.

But, like the PMLN scheme, the PTI scheme suffers from one major defect. It excludes “holders of public office” in the last twenty years. Why twenty years? Why not the last five or last thirty? What is the objective criterion for this cut-off date? Then there’s the definition of public office. It is all encompassing, spanning full three pages of an Ordinance. It includes everyone from the President of Pakistan at the top to Tehsil Nazims at the bottom, including paid private sector executives, advisors, consultants, etc., of statutory organisations or institutions or organisations in the control of the government of Pakistan. In other words, it excludes tens of thousands of officials and “public” representatives who are amongst the most corrupt in the country. This is the cream of the elite that has captured the state. This is the elite against whom we all love to rail. But what is good for the goose is not good for the gander. It seems that the bowels of the state of Pakistan are not to be cleansed after all.

The Tax Amnesty Scheme was nine months in the making. If the PMLN scheme had been extended when the PTI government took over, there would have been a lot of money in the coffers today. In the event, it took half a day to be promulgated via a Presidential Ordinance after proroguing the National Assembly so that it couldn’t be debated.

The small print in the IMF Agreement and Tax Amnesty Scheme testifies to the incompetence of the PTI regime in the face of rising national security challenges to the state of Pakistan. The forecast is grim.

Pakistan and the IMF program

Najam Sethi

US Army Special Operations Forces Unconventional Warfare, FM3-05.130, 30 Sep 2008

Summary

The 248-page document presents the September 2008 revision of the US Army Field Manual (FM) 3-05.130, Army Special Operations Forces Unconventional Warfare, establishing keystone doctrine for Army special operations forces (ARSOF) operations in unconventional warfare (UW). The purpose of the manual is to be useful to understanding the nature of UW and its role in the nation's application of power.

Unconventional Warfare, as of this manual is being defined as Operations conducted by, with, or through irregular forces in support of a resistance movement, an insurgency, or conventional military operations., reflecting two important criteria: UW must be conducted by, with, or through surrogates; and such surrogates must be irregular forces.

The nine chapters cover topics such as Special Forces, Psychological as well as Civil Affairs Operations, while also covering general doctrine, policies and planning considerations in respect to Army special operations forces.

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Trump has a point about globalisation

Larry Elliott in The Guardian

The president’s belief that the nation state can cure economic ills is not without merit


  

‘The stupendous growth posted by China over the past four decades has been the result of doing the opposite of what the globalisation textbooks recommend.’ Photograph: AFP/Getty Images


Once every three years the International Monetary Fund and the World Bank hold their annual meetings out of town. Instead of schlepping over to Washington, the gathering of finance ministers and central bank governors is hosted by a member state. Ever since the 2000 meeting in Prague was besieged by anti-globalisation rioters, the away fixtures have tended to be held in places that are hard to get to or where the regime tends to take a dim view of protest: Singapore, Turkey, Peru.

This year’s meeting will take place in a couple of weeks on the Indonesian island of Bali, where the IMF and the World Bank can be reasonably confident that the meetings will not be disrupted. At least not from the outside. The real threat no longer comes from balaclava-wearing anarchists throwing Molotov cocktails but from within. Donald Trump is now the one throwing the petrol bombs and for multilateral organisations like the IMF and World Bank, that poses a much bigger threat.

The US president put it this way in his speech to the United Nations on Tuesday: “We reject the ideology of globalism and we embrace the doctrine of patriotism.” For decades, the message from the IMF has been that breaking down the barriers to trade, allowing capital to move unhindered across borders and constraining the ability of governments to regulate multinational corporations was the way to prosperity. Now the most powerful man on the planet is saying something different: that the only way to remedy the economic and social ills caused by globalisation is through the nation state. Trump’s speech was mocked by fellow world leaders, but the truth is that he’s not a lone voice.

The world’s other big economic superpower – China – has never given up on the nation state. Xi Jinping likes to use the language of globalisation to make a contrast with Trump’s protectionism, but the stupendous growth posted by China over the past four decades has been the result of doing the opposite of what the globalisation textbooks recommend. The measures traditionally frowned upon by the IMF – state-run industries, subsidies, capital controls – have been central to Beijing’s managed capitalism. China has certainly not closed itself off from the global economy but has engaged on its own terms. When the communist regime wanted to move people out of the fields and into factories it did so through the mechanism of an undervalued currency, which made Chinese exports highly competitive. When the party decided that it wanted to move into more sophisticated, higher-tech manufacturing, it insisted that foreign companies wishing to invest in China share their intellectual property.

This sort of approach isn’t new. It was the way most western countries operated in the decades after the second world war, when capital controls, managed immigration and a cautious approach to removing trade barriers were seen as necessary if governments were to meet public demands for full employment and rising living standards. The US and the EU now say that China is not playing fair because it has been prospering with an economic strategy that is supposed not to work. There is some irony in this.

The idea that the nation state would wither away was based on three separate arguments. The first was that the barriers to the global free movement of goods, services, people and money were economically inefficient and that removing them would lead to higher levels of growth. This has not been the case. Growth has been weaker and less evenly shared.

The second was that governments couldn’t resist globalisation even if they wanted to. This was broadly the view once adopted by Bill Clinton and Tony Blair, and now kept alive by Emmanuel Macron. The message to displaced workers was that the power of the market was – rather like a hurricane or a blizzard – an irresistible force of nature. This has always been a dubious argument because there is no such thing as a pure free market. Globalisation has been shaped by political decisions, which for the past four decades have favoured the interests of capital over labour.
Finally, it was argued that the trans-national nature of modern capitalism made the nation state obsolete. Put simply, if economics was increasingly global then politics had to go global, too. There is clearly something in this because financial markets impose constraints on individual governments and it would be preferable for there to be a form of global governance pushing for stability and prosperity for all. The problem is that to the extent such an institutional mechanism exists, it has been captured by the globalists. That is as true of the EU as it is of the IMF.

So while the nation state is far from perfect, it is where an alternative to the current failed model will inevitably begin. Increasingly, voters are looking to the one form of government where they do have a say to provide economic security. And if the mainstream parties are not prepared to offer what these voters want – a decently paid job, properly funded public services and controls on immigration – then they will look elsewhere for parties or movements that will. This has proved to be a particular problem for the parties of the centre left – the Democrats in the US, New Labour in Britain, the SDP in Germany – that signed up to the idea that globalisation was an unstoppable force.

Jeremy Corbyn certainly does not accept the idea that the state is obsolete as an economic actor. The plan is to build a different sort of economy from the bottom up – locally and nationally. That’s not going to be easy but beats the current, failed, top-down approach.

Move over central bankers, your models are part of the problem

The new masters of the universe are struggling to understand what makes a modern economy tick and their actions could prove harmful.

Chris Giles in The Financial Times

Central bankers usurped the titans of Wall Street as the masters of the universe almost a decade ago. They rescued the global economy from the financial crisis, flooding the world with cheap money. They used their powers effectively to get banks lending again. Their actions raised asset prices, keeping business and consumer confidence up. Financial markets and populations hang on their words. But never have they been so vulnerable. 

As they gather in Washington for the annual meetings of the International Monetary Fund, there is a crisis of confidence in central banking. Their economic models are failing and there are doubts whether they understand the effects of interest rates and other monetary policies on the economy. 

In short, the new masters of the universe might not understand what makes a modern economy tick and their well-intentioned actions could prove harmful. 

While there have long been critics of the power of central bankers on the left and the right, such profound doubts have never been so present within their narrow world. In the words of billionaire investor Warren Buffett, they risk being the next ones to be found swimming naked when the tide goes out. 

The ability of central banks to resolve these questions does not just affect growth rates, but is fundamental to the health of the democracies of advanced economies, many of which have been assailed by populist uprisings. 

“If we can’t get inflation back up [trouble lies ahead]. We can’t have political stability without wage growth,” says Adam Posen, head of the Peterson Institute and formerly a central banker at the Bank of England. 

The root of the current insecurity around monetary policy is that in advanced economies — from Japan to the US — inflation is not behaving in the way economic models predicted. 

Deflation failed to materialise in the depths of the great recession of 2008-09 and now that the global economy is enjoying its broadest and strongest upswing since 2010, inflationary pressures are largely absent. Even as the unemployment rate across advanced economies has fallen from almost 9 per cent in 2009 to less than 6 per cent today, IMF figures this week show wage growth has been stuck hovering around annual increases of 2 per cent. The normal relationships in the labour market have broken down. 

Amid this forecasting nightmare, some frank talk is breaking out. Janet Yellen, chair of the US Federal Reserve and the world’s most important central banker, has been the most direct. “Our framework for understanding inflation dynamics could be mis-specified in some fundamental way,” she said last month. Her sentiments are spreading. 

For Mark Carney, governor of the BoE, global considerations “have made it more difficult for central banks to set policy in order to achieve their objectives”. Mario Draghi, president of the European Central Bank, is keeping the faith for now, but observes, “the ongoing economic expansion . . . has yet to translate sufficiently into stronger inflation dynamics”. 

Claudio Borio, chief economist of the Bank for International Settlements, which provides banking services to the world’s central banks, says: “If one is completely honest, it is hard to avoid the question: how much do we really know about the inflation process?” 

The details of macroeconomic models are fiendishly complicated, but at their heart is a relationship — called the Phillips curve — between the economic cycle and inflation. The cycle can be measured by unemployment, the rate of growth or other variables, and the model predicts that if the economy is running hot — if unemployment falls below a long-run sustainable level or if growth is persistently faster than its speed limit — inflation will rise. 

The models are augmented by a concept of inflation expectations, which keep inflation closer to a central bank’s target — usually 2 per cent — if the public trusts that central bankers will do whatever it takes to return inflation to that level after any temporary deviation. The holy grail for central bankers is to claim credibly that they have “anchored inflation expectations” at the target level. 

In the model, the most important factors that explain price movements are therefore the degree to which the economy has room to grow without inflation, termed “slack” or “the output gap”, and the public’s inflation expectations. 

The role of central banks in the model is to set the short-term interest rate. If a central bank sets its official interest rates low, people and companies will be encouraged to borrow more to spend and invest and discouraged from saving, boosting the economy in the short term. Higher interest rates cool demand. 

The first fundamental problem with the model is, as Mr Borio says, “the link between measures of domestic slack and inflation has proved rather weak and elusive for at least a couple of decades”. 

While Japan’s unemployment rate is now back down to the levels of the 1970s and 1980s boom, leaving little slack, inflation is barely above zero. In Britain, unemployment has almost halved since 2010, but wage growth has stuck resolutely at 2 per cent a year. 

But many economists and central bankers are wedded to the underlying theory, which is about 30 years old, and seek to tweak it to explain recent events rather than ditch it in favour of less orthodox ideas. Such nips and tucks are occurring all over the world, although the explanations differ. 

Ms Yellen has highlighted measurement issues in inflation and “idiosyncratic shifts in the prices of some items, such as the large decline in telecommunication service prices seen earlier in the year”. Similarly, the ECB is fond of a new definition — “super core inflation”, which strips out more items from the index and shows the bank performing better against its target than the headline measure. But few central bankers are happy with meeting targets only once they have moved the goalposts. 

A second explanation is that the level of unemployment that is consistent with stable inflation has fallen. In 2013, the BoE thought the UK economy could not withstand unemployment falling below 7 per cent before wages and inflation would pick up. It now thinks that rate is 4.5 per cent. On this reasoning, inflation has been low because there was more slack in the economy than they had thought. 

The problem with such explanations, as Daniel Tarullo, a Fed governor for eight years until April, notes, is that if central bankers keep changing their notion of sustainable unemployment levels “sound estimation and judgment are sometimes hard to differentiate from guesswork in attempting to see through transitory developments”. 

A third explanation is that central bankers have been so successful in anchoring inflation expectations, companies do not seek to raise prices any faster and workers do not ask for wage rises even when jobs are plentiful. 

Mr Draghi recently urged union pay bargainers to stop looking backward at inflation rates of the past when they negotiate wages, in a move that used to be unthinkable for a central banker. The problem with this explanation is both the self-serving reasoning and the fact that inflation expectations cannot be measured. 

“Over my time at the Fed, I came to worry that inflation expectations are bearing an awful lot of weight in monetary policy these days, considering the range and depth of unanswered questions about them,” says Mr Tarullo. 

The Bank of Japan, meanwhile, frets that companies are cutting employees’ hours and raising productivity rather than paying more, which is hampering its ability to push up inflation despite extremely low unemployment. 

If it was not bad enough that the link between the economic cycle and inflation has broken down, the second fundamental problem in central banking is that estimates of the neutral rate of interest — seen as the long-term rate of interest that balances people’s desire to save and invest with their desire to borrow and spend — appear to have fallen persistently across the world. 

The Fed’s central estimates of the real neutral interest rate has declined by nearly two-thirds in five years, from 2 per cent to 0.75 per cent. But the figures are again little more than guesswork. As Ms Yellen said, “[the neutral rate’s] value at any point in time cannot be estimated or projected with much precision”. 

Whether it is because ageing populations want to save more or because of a global “savings glut”, as former Fed chair Ben Bernanke said, low rates no longer have the same impact, limiting the effectiveness of the medicine central banks want to administer. 

Regardless of the terminology, the two problems combined suggest central bankers cannot easily determine whether their economies need stimulus or cooling and do not know whether their monetary tools are helping them do their job. And there is increasing concern, even expressed by Ms Yellen, that the underlying theoretical model might simply be rotten to the core and attempts to tweak it are futile. 

“Essentially you are setting policy on things you don’t know and can’t measure and then reasoning after the fact,” says Mr Tarullo. His core argument is that central banks maintain an absolute faith in the model with absolutely no evidence to support it. 

At a conference last month to celebrate the BoE’s 20 years of independence, Christina Romer, professor of economics at the University of California, Berkeley, urged central bankers to have a more open mind. 

New research is needed to question whether current thinking is deficient, she said, “and if such research suggests our ideas explaining how the economy works are wrong or need to change, then central bankers need to embrace those ideas”. 

The most aggressive critic of the consensus is Mr Borio of the BIS. He accuses central bankers of misunderstanding the drivers of inflation and their effects on the economy. His argument is that global forces of trade integration and technology are more convincing than concepts of domestic slack in explaining the absence of pricing power among companies and employees. 

He asks: “Is it reasonable to believe that the inflation process should have remained immune to the entry into the global economy of the former Soviet bloc and China and to the opening up of other emerging market economies?” 

His concern is that by keeping interest rates low, central bankers have no effect on inflation or the economy other than to increase the level of debt. The result is that it will be harder “to raise interest rates without causing economic damage, owing to the large debts and distortions in the real economy that the financial cycle creates”. 

It is not a popular view, but it is no longer dismissed out of hand. Ms Yellen justified her stance on continuing to raise interest rates gradually in the face of persistently low inflation by appealing to concerns about debt. 

“Persistently easy monetary policy might also eventually lead to increased leverage and other developments, with adverse implications for financial stability,” she said. 

With central bankers credited for keeping the economic show on the road over the past decade, it will come as a shock to many to hear how little confidence they have in their models, their policies and their tools. 

One question posed by Richard Barwell, a senior economist at BNP Paribas, is whether they should let on about how little they know. “It’s rather like Daddy is driving the car down a hill, turning round to the family and saying, ‘I’m not sure the brakes work, but trust me anyway’,” he says. 

For now, the public still trust the women and men who work in the marbled halls of central banks around the world. But that confidence is fragile. Central bankers might have been the masters of the universe of the past decade, but they know well what happened to the previous holders of that title.

IMF: higher taxes for rich will cut inequality without hitting growth

Analysis supports tax strategy of Jeremy Corbyn’s Labour in UK – and undermines that of Donald Trump in US

Larry Elliott in The Guardian


The IMF said tax theory suggested there should be ‘significantly higher’ tax rates for high earners. Photograph: Oli Scarff/Getty Images


Higher income tax rates for the rich would help reduce inequality without having an adverse impact on growth, the International Monetary Fund has said.

The Washington-based IMF used its influential half-yearly fiscal monitor to demolish the argument that economic growth would suffer if governments in advanced Western countries forced the top 1% of earners to pay more tax.

The IMF said tax theory suggested there should be “significantly higher” tax rates for those on higher incomes but the argument against doing so was that hitting the rich would be bad for growth.

But the influential global institution said: “Empirical results do not support this argument, at least for levels of progressivity that are not excessive.” The IMF added that different types of wealth taxes might also be considered.

Labour seized on the report, calling for higher taxes on the rich, citing the IMF’s intervention as evidence of the need for a fairer tax system.

In its election manifesto, Labour proposed a new 45% tax band on those earning more than £80,000 and a 50% rate for those on more than £123,000.

John McDonnell, the shadow chancellor, said: “The IMF support the argument we made in the General Election for a fairer tax system. There is no evidence to support those who scaremonger about the effects of making the rich pay fairer tax.”

He added: “ Not only have the Tories slashed the top rate of tax, they still plan billions in tax giveaways to the super rich and big corporations over this parliament.”

Despite claims from ministers that Labour’s tax plans would be both politically and economically damaging, McDonnell believes higher taxes for the rich would be both workable and popular.

“With every day that passes the case for a change of direction at the Treasury grows. Instead of engaging in infighting in his own party the chancellor should listen to Labour’s calls for fairer taxes and increased investment, so we will build an economy for the many not the few.”

Theresa May has repeatedly attacked Labour’s approach as extreme, claiming in prime minister’s questions on Wednesday that Corbyn and McDonnell are on “planet Venezuela”.

But the prime minister conceded at a fringe meeting at her party’s conference in Manchester that public opinion appears to be more favourable to some of Labour’s economic ideas than Conservative strategists had assumed in the run-up to June’s general election.

“We thought there was a political consensus,” she said. “Jeremy Corbyn changed that”.

With Philip Hammond due to deliver his budget next month, it is unclear whether the government will press ahead with promised tax cuts for higher earners, including plans to increase the higher rate threshold for income tax to £50,000.

The fiscal monitor does not mention any country by name and does not specify at what level governments should set the new higher rate for top earners. But the report stressed that cutting tax for the top 1% had gone too far - a strong hint that the IMF has doubts about the pro-rich tax plan proposed by Donald Trump for the US.

Instead, the IMF said higher tax for the rich was necessary to arrest rising income inequality – the argument used by McDonnell and the Labour leader Jeremy Corbyn.

The fiscal monitor said most advanced economies in the West had experienced a sizeable increase in income inequality in the past three decades, driven primarily by the growing income of the top 1%.

Traditionally, governments have sought to make their societies less unequal by levying higher income tax rates on the rich and using the proceeds to help those less well off either directly or through public services.

But it found that income tax systems had become markedly less progressive in the 1980s and 1990s and had remained stable since then, even though growing inequality raised the need for a more progressive approach.

In an IMF blog, the head of the IMF’s fiscal affairs unit, Vitor Gaspar, said the average top income tax rate for the rich country members of the Organisation for Economic Cooperation and Development had fallen from 62% in 1981 to 35% in 2015.

“In addition, tax systems are less progressive than indicated by the statutory rates, because wealthy individuals have more access to tax relief,” Gaspar said in the blog co-written with Mercedes Garcia-Escribano. “Importantly, we find that some advanced economies can increase progressivity without hampering growth, as long as progressivity is not excessive.”

IMF research found that between 1985 and 1995, redistribution through the tax system had offset 60% of the increase in inequality caused by market forces. But between 1995 and 2010, income tax systems failed to respond to the continuing increase in inequality.

It also said inequality should be tackled by giving a more pro-poor slant to public spending.

“Despite progress, gaps in access to quality education and healthcare services between different income groups in the population remain in many countries,” Gaspar and Garcia-Escribano said, adding that in rich countries men with university education lived up to 14 years longer than those with secondary education or less.

“Better public spending can help, for instance, by reallocating education or health spending from the rich to the poor while keeping total public education or health spending unchanged,” they added.

In its separate global financial stability review, the IMF said it would take several years for central banks to return interest rates to more normal levels due to the risk of aborting recovery.

But the report also highlighted the risk that prolonged monetary support could lead to the buildup of further financial excesses. Too much money was chasing too few assets offering a yield, the IMF said.

A Treasury spokesperson said: “A fair tax system is a critical part of our plan to build a fairer society. Today, the richest 1% pay over a quarter of all income tax while 4 million of the lower earners have been taken out of income tax altogether.”

‘From bad to worse’: Greece hurtles towards a final reckoning

Helena Smith in The Guardian


Dimitris Costopoulos stood, worry beads in hand, under brilliant blue skies in front of the Greek parliament. Wearing freshly pressed trousers, polished shoes and a smart winter jacket – “my Sunday best” – he had risen at 5am to get on the bus that would take him to Athens 200 miles away and to the great sandstone edifice on Syntagma Square. By his own admission, protests were not his thing.

At 71, the farmer rarely ventures from Proastio, his village on the fertile plains of Thessaly. “But everything is going wrong,” he lamented on Tuesday, his voice hoarse after hours of chanting anti-government slogans.

---For Background Knowledge read:

Yanis Varoufakis and the Greek Tragedy

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“Before there was an order to things, you could build a house, educate your children, spoil your grandchildren. Now the cost of everything has gone up and with taxes you can barely afford to survive. Once I’ve paid for fuel, fertilisers and grains, there is really nothing left.”

Costopoulos is Greece’s Everyman; the human voice in a debt crisis that refuses to go away. Eight years after it first erupted, the drama shows every sign of reigniting, only this time in a new dark age of Trumpian politics, post-Brexit Europe, terror attacks and rise of the populist far right.

“I grow wheat,” said Costopoulos, holding out his wizened hands. “I am not in the building behind me. I don’t make decisions. Honestly, I can’t understand why things are going from bad to worse, why this just can’t be solved.”

As Greece hurtles towards another full-blown confrontation with the creditors keeping it afloat, and as tensions over stalled bailout negotiations mount, it is a question many are asking.

The country’s epic struggle to avert bankruptcy should have been settled when Athens received €110bn in aid – the biggest financial rescue programme in global history – from the EU and International Monetary Fund in May 2010. Instead, three bailouts later, it is still wrangling over the terms of the latest €86bn emergency loan package, with lenders also at loggerheads and diplomats no longer talking of a can, but rather a bomb, being kicked down the road. Default looms if a €7.4bn debt repayment – money owed mostly to the European Central Bank – is not honoured in July.



Farmer Dimitris Costopoulos in front of the Greek parliament in Athens. Photograph: Helena Smith for the Observer

Amid the uncertainty, volatility has returned to the markets. So, too, has fear, with an estimated €2.2bn being withdrawn from banks by panic-stricken depositors since the beginning of the year. With talk of Greece’s exit from the euro being heard again, farmers, trade unions and other sectors enraged by the eviscerating effects of austerity have once more come out in protest.

From his seventh-floor office on Mitropoleos, Makis Balaouras, an MP with the governing Syriza party, has a good view of the goings-on in Syntagma. Demonstrations – what the former trade unionist calls “the movement” – are a fine thing. “I wish people were out there mobilising more,” he sighed. “Protests are in our ideological and political DNA. They are important, they send a message.”

This is the irony of Syriza, the leftwing party catapulted to power on a ticket to “tear up” the hated bailout accords widely blamed for extraordinary levels of Greek unemployment, poverty and emigration. Two years into office it has instead overseen the most punishing austerity measures to date, slashing public-sector salaries and pensions, cutting services, agreeing to the biggest privatisation programme in European history and raising taxes on everything from cars to beer – all of which has been the price of the loans that have kept default at bay and Greece in the euro.

In the maelstrom the economy has improved, with Athens achieving a noticeable primary surplus last year, but the social crisis has intensified.

For men like Balaouras, who suffered appalling torture for his leftwing beliefs at the hands of the 1967-74 colonels’ regime, the policies have been galling. With the IMF and EU arguing over the country’s ability to reach tough fiscal targets when the current bailout expires in August next year, the demand for €3.6bn of more measures has left many in Syriza reeling. Without upfront legislation on the reforms, creditors say, they cannot conclude a compliance review on which the next tranche of bailout aid hangs.

“We had an agreement,” insisted Balaouras, looking despondently down at his desert boots. “We kept to our side of the deal, but the lenders haven’t kept to their side because now they are asking for more. We want the review to end. We want to go forward. This situation is in the interests of no one. But to get there we have to have an honourable compromise. Without that there will be a clash.”

It had been hoped that an agreement would be struck on Monday at what had been billed as a high-stakes meeting of euro area finance ministers. On Friday, EU officials announced that the deadline had been all but missed because there had been little convergence between the two sides.

With the Netherlands holding general elections next month, and France and Germany also heading to the polls in May and September, fears of the dispute becoming increasingly politicised have added to its complexity. Highlighting those concerns, the German chancellor, Angela Merkel, attempted to end the rift that has emerged between eurozone lenders and the IMF over the fund’s insistence that Greece can only begin to recover if its €320bn debt pile is reduced substantially.

In talks with Christine Lagarde, the Washington-based IMF’s managing director, Merkel agreed to discuss the issue during a further meeting between the two women to be held on Wednesday. The IMF has steadfastly refused to sign up to the latest bailout, arguing that Greek debt is not only unmanageable but on a trajectory to become explosive by 2030. Berlin, the biggest contributor of the €250bn Greece has so far received, says it will be unable to disburse further funds without the IMF on board.

The assumption is that the prime minister, Alexis Tsipras, will cave in, just as he did when the country came closest yet to leaving the euro at the height of the crisis in the summer of 2015. But the 41-year-old leader, like Syriza, has been pummelled in the polls. Persuading disaffected backbenchers to support more measures, and then selling them to a populace exhausted by repeated rounds of austerity, will be extremely difficult. Disappointment has increasingly given way to the death of hope – a sentiment reinforced by the realisation that Cyprus and other bailed-out countries, by contrast, are no longer under international supervision.

In his city centre office, the former finance minister Evangelos Venizelos pondered where Greece’s predicament was now. “[We are] at the same point we were several years ago,” he joked. “The only difference is that anti-European sentiment is growing. What was once a very friendly country towards Europe is becoming increasingly less so, and with that comes a lot of danger, a lot of risk.”

When historians look back they, too, may conclude that Greece has expended a great deal of energy not moving forward at all.

The arc of crisis that has swept the country – coursing like a cancer through its body politic, devastating its public health system, shattering lives – has been an exercise in the absurd. The feat of pulling off the greatest fiscal adjustment in modern times has spawned a slump longer and deeper than the Great Depression, with the Greek economy shrinking more than 25% since the crisis began.

Even if the latest impasse is broken and a deal is reached with creditors soon, few believe that in a country of weak governance and institutions it will be easy to enforce. Political turbulence will almost certainly beckon; the prospect of “Grexit” will grow.

“Grexit is the last thing we want, but we may arrive at a point of serious dilemmas,” said Venizelos. “Whatever deal is reached will be very difficult to implement, but that notwithstanding, it is not the memoranda [the bailout accords] that caused the crisis. The crisis was born in Greece long before.”

Like every crisis government before it, Tsipras’s administration is acutely aware that salvation will come only when Greece can return to the markets and raise funds. What happens in the weeks ahead could determine if that is likely to happen at all.

Back in Syntagma, Costopoulos the good-natured farmer ponders what lies ahead. Like every Greek, he stands to be deeply affected. “All I know is that we are all being pushed,” he said, searching for the right words. “Pushed in the direction of somewhere very explosive, somewhere we do not want to be.”

You’re witnessing the death of neoliberalism – from within

Aditya Chakrabortty in The Guardian

IMF economists have published a remarkable paper admitting that the ideology was oversold

‘You hear it when the Bank of England’s Mark Carney sounds the alarm about ‘a low-growth, low-inflation, low-interest-rate equilibrium’. Photograph: Dylan Martinez/AFP/Getty Images



What does it look like when an ideology dies? As with most things, fiction can be the best guide. In Red Plenty, his magnificent novel-cum-history of the Soviet Union, Francis Spufford charts how the communist dream of building a better, fairer society fell apart. 

Even while they censored their citizens’ very thoughts, the communists dreamed big. Spufford’s hero is Leonid Kantorovich, the only Soviet ever to win a Nobel prize for economics. Rattling along on the Moscow metro, he fantasises about what plenty will bring to his impoverished fellow commuters: “The women’s clothes all turning to quilted silk, the military uniforms melting into tailored grey and silver: and faces, faces the length of the car, relaxing, losing the worry lines and the hungry looks and all the assorted toothmarks of necessity.”

But reality makes swift work of such sandcastles. The numbers are increasingly disobedient. The beautiful plans can only be realised through cheating, and the draughtsmen know it better than any dissidents. This is one of Spufford’s crucial insights: that long before any public protests, the insiders led the way in murmuring their disquiet. Whisper by whisper, memo by memo, the regime is steadily undermined from within. Its final toppling lies decades beyond the novel’s close, yet can already be spotted.

When Red Plenty was published in 2010, it was clear the ideology underpinning contemporary capitalism was failing, but not that it was dying. Yet a similar process as that described in the novel appears to be happening now, in our crisis-hit capitalism. And it is the very technocrats in charge of the system who are slowly, reluctantly admitting that it is bust.

You hear it when the Bank of England’s Mark Carney sounds the alarm about “a low-growth, low-inflation, low-interest-rate equilibrium”. Or when the Bank of International Settlements, the central bank’s central bank, warns that “the global economy seems unable to return to sustainable and balanced growth”. And you saw it most clearly last Thursday from the IMF.

What makes the fund’s intervention so remarkable is not what is being said – but who is saying it and just how bluntly. In the IMF’s flagship publication, three of its top economists have written an essay titled “Neoliberalism: Oversold?”.

The very headline delivers a jolt. For so long mainstream economists and policymakers have denied the very existence of such a thing as neoliberalism, dismissing it as an insult invented by gap-toothed malcontents who understand neither economics nor capitalism. Now here comes the IMF, describing how a “neoliberal agenda” has spread across the globe in the past 30 years. What they mean is that more and more states have remade their social and political institutions into pale copies of the market. Two British examples, suggests Will Davies – author of the Limits of Neoliberalism – would be the NHS and universities “where classrooms are being transformed into supermarkets”. In this way, the public sector is replaced by private companies, and democracy is supplanted by mere competition.

The results, the IMF researchers concede, have been terrible. Neoliberalism hasn’t delivered economic growth – it has only made a few people a lot better off. It causes epic crashes that leave behind human wreckage and cost billions to clean up, a finding with which most residents of food bank Britain would agree. And while George Osborne might justify austerity as “fixing the roof while the sun is shining”, the fund team defines it as “curbing the size of the state … another aspect of the neoliberal agenda”. And, they say, its costs “could be large – much larger than the benefit”.

IMF managing director Christine Lagarde with George Osborne. ‘Since 2008, a big gap has opened up between what the IMF thinks and what it does.’ Photograph: Kimimasa Mayama/EPA

Two things need to be borne in mind here. First, this study comes from the IMF’s research division – not from those staffers who fly into bankrupt countries, haggle over loan terms with cash-strapped governments and administer the fiscal waterboarding. Since 2008, a big gap has opened up between what the IMF thinks and what it does. Second, while the researchers go much further than fund watchers might have believed, they leave in some all-important get-out clauses. The authors even defend privatisation as leading to “more efficient provision of services” and less government spending – to which the only response must be to offer them a train ride across to Hinkley Point C.

Even so, this is a remarkable breach of the neoliberal consensus by the IMF. Inequality and the uselessness of much modern finance: such topics have become regular chew toys for economists and politicians, who prefer to treat them as aberrations from the norm. At last a major institution is going after not only the symptoms but the cause – and it is naming that cause as political. No wonder the study’s lead author says that this research wouldn’t even have been published by the fund five years ago.

From the 1980s the policymaking elite has waved away the notion that they were acting ideologically – merely doing “what works”. But you can only get away with that claim if what you’re doing is actually working. Since the crash, central bankers, politicians and TV correspondents have tried to reassure the public that this wheeze or those billions would do the trick and put the economy right again. They have riffled through every page in the textbook and beyond – bank bailouts, spending cuts, wage freezes, pumping billions into financial markets – and still growth remains anaemic.

And the longer the slump goes on, the more the public tumbles to the fact that not only has growth been feebler, but ordinary workers have enjoyed much less of its benefits. Last year the rich countries’ thinktank, the OECD, made a remarkable concession. It acknowledged that the share of UK economic growth enjoyed by workers is now at its lowest since the second world war. Even more remarkably, it said the same or worse applied to workers across the capitalist west.

Red Plenty ends with Nikita Khrushchev pacing outside his dacha, to where he has been forcibly retired. “Paradise,” he exclaims, “is a place where people want to end up, not a place they run from. What kind of socialism is that? What kind of shit is that, when you have to keep people in chains? What kind of social order? What kind of paradise?”

Economists don’t talk like novelists, more’s the pity, but what you’re witnessing amid all the graphs and technical language is the start of the long death of an ideology.