KUALA LUMPUR, Malaysia, May 15 (IPS) – The International Monetary Fund has warned of “modest growth” and “popular dissatisfaction” over the next decade, with the poorest economies worst off. But just like the inaction on Gaza, multilateral organizations have done little to avert looming disaster.
IMF’s grim forecast
International Monetary Fund (IMF) Managing Director Kristalina Georgieva announced the stark warning ahead of the spring meetings of the Bretton Woods institutions last month, noting that since 2020 the world economy has Loss of $3.3 trillion.
Rather than prioritizing economic recovery, Washington’s Treasury ministers and central bankers agreed to continue with policies that worsened the situation. After all, curbing inflation helps maintain the value of financial assets.
Current policies to curb demand are necessary for financial stability. They have done nothing to address the various “supply-side disruptions” that are causing persistent inflationary pressures.
These include the “new geopolitics”, the COVID-19 pandemic, wars, illegal unilateral sanctions and market manipulation. Ostensibly anti-inflationary measures thus add to pressures for secular stagnation.
Brave new world!
The new Cold War and other geopolitical factors of the past decade have increasingly affected global economic and financial policy. Powerful states have weaponized their formulation, implementation and enforcement.
Years of economic stagnation have weakened productive capacity and competitiveness. At the same time, recent geopolitics have also transformed geoeconomic relations, hegemons, and their grievances. Laws, regulations and judicial procedures are increasingly used for political and economic gain.
Thus, the economic and geopolitical policies of Western governments have created inflationary pressures, albeit unintentionally. The perception of a strategic recession is largely attributable to the market-based policies ostensibly pursued.
The European Central Bank will follow the Federal Reserve in raising interest rates starting in 2022. Not surprisingly, monetary authorities in most developing countries have had to raise interest rates to reduce capital flight and strengthen exchange rates.
The central bank’s interest rate hikes have increased capital costs, squeezing consumption and investment. Rate hikes have proven to be blunt and limited, while more appropriate measures have been more effective in curbing inflation.
Instead of curbing inflation caused by supply disruptions, high interest rates have squeezed investment and consumer spending by the private sector and the government. Such cuts hurt demand, jobs and incomes around the world.
While interest rate hikes around the world have been contractionary, other U.S. macroeconomic policies since the 2008 global financial crisis have maintained full employment in the world’s largest economy, with limited gains for most other economies. .
Policymakers’ hands are tied
Many developing country governments borrowed heavily in the late 1970s, mainly from Western commercial banks. But after the Federal Reserve sharply raised interest rates starting in 1979, severe sovereign debt woes paralyzed many heavily indebted governments in Latin America and Africa for at least a decade.
In the decade leading up to 2022, governments have borrowed more and more, increasingly from bond markets, leaving many developing economies under debt stress. This is likely to be worse than the 1980s because debt levels are higher and creditors are more diverse.
As lending risks have increased significantly and become more market-oriented, borrowing from banks has decreased and debt resolution has become more difficult. Many governments also guarantee the borrowings of state-owned enterprises, and some even provide guarantees to well-connected private companies.
At the same time, policymakers in developing countries today are even more constrained by their own circumstances. They are vulnerable to market volatility, have fewer macroeconomic policy tools available, and face procyclical policy biases due to market pressures and supportive institutions.
In addition to financial market pressure for fiscal austerity, multilateral financial institutions such as the International Monetary Fund have also imposed such conditions on countries seeking emergency credit and other debt relief.
All of this has led to deep cuts in government spending, especially public investment that is crucial to the recovery of the real economy. So despite the urgent need for such counter-cyclical spending, the government has committed not to spend.
Voluntary vulnerability?
Central bank independence often means greater sensitivity to market pressures and private financial interests rather than national and government policy priorities.
Rather than strengthening national capacities and capabilities, central bank independence and autonomous fiscal policy authorities disarm developing country governments in the face of greater external vulnerabilities.
This toxic combination is likely to leave vulnerable governments trapped in long-term debt burdens with no way to escape, let alone create space for them to create new conditions for growth.
Economic liberalization and globalization have irreversibly changed developing economies and have had lasting effects. Export opportunities have become more limited, not least due to the weaponization of economic policy.
Meanwhile, most developing countries still turn to private creditors for help, despite higher interest rates and borrowing costs. But since the Federal Reserve sharply raised interest rates in 2022, private market lending to even the poorest countries has dried up.
As Federal Reserve interest rates rise, the financial industry abandons developing countries for the “safety” of U.S. markets. As debt service costs soar, distress risks rise sharply.
As a result, many economies in the global South barely grew, especially after the early collapse in commodity prices, as early investment led to higher supply and lower demand, causing prices to deteriorate further.
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© Inter Press Service (2024) — All rights reservedOriginal source: Inter Press Service
