How will Budget 2021 address well-being and recovery?

Catch this Astro Vizhuthugal interview (in English) with Jomo, conducted on 29 October 2020, about 2 weeks before the Budget was unveiled, where he observes we are simultaneously facing an economic crisis, a Covid-19 crisis and a political crisis.

He refers to many countries and states which did not resort to severe lockdown measures but relied on strong early and appropriate action, involving an All of Government approach.

Watch the full interview here: https://drive.google.com/file/d/1ua2BQQMV1D-kN5HzjUfl7psb72yCzKxX/view

COVID-19 compounding inequalities

Jomo Kwame Sundaram and Anis Chowdhury

KUALA LUMPUR and SYDNEY: The United Nations’ renamed World Social Report 2020 (WSR 2020) argued that income inequality is rising in most developed countries, and some middle-income countries, including China, the world’s fastest growing economy in recent decades.

Inequality dimensions

While overall inter-country inequalities may have declined owing to the rapid growth of economies like China, India and East Asia, national inequalities have been growing for much of the world’s population, generating resentment.

In 2005, when the focus was on halving poverty, thus ignoring inequality, the UN drew attention to The Inequality Predicament. Secretary-General Kofi Annan warned that growing inequality within and between countries was jeopardizing achievement of the internationally agreed development goals.

“Leave no one behind” has become the rallying cry of the 2030 Agenda for Sustainable Development. Reducing inequality within and among countries is now the tenth of the Sustainable Development Goals (SDGs) adopted in 2015.

Uneven and unequal economic growth over several decades has deepened the divides within and across countries. Thus, growing inequality and exclusion were highlighted in earlier WSRs on Inequality Matters, The Imperative of Inclusive Development and Promoting Inclusion Through Social Protection.

The UNDP’s Human Development Report 2019 (HDR 2019) drew attention to profound education and health inequalities. While disparities in ‘basic capabilities’ (e.g., primary education and life expectancy) are declining, inequalities in ‘enhanced capabilities’ (e.g., higher education) are growing.

Meanwhile, inequalities associated with social characteristics, e.g., ethnicity and gender, have been widening. The January 2020 Oxfam Davos report, Time to Care, highlighted wealth inequalities as the number of billionaires doubled over the last decade to 2,153 billionaires, owning more than the poorest 60% of 4.6 billion.

Drivers of inequalities

WSR 2020 shows that the wealthiest generally increased their income shares during 1990-2015. With large and growing disparities in public social provisioning, prospects for upward social mobility across generations have been declining.

HDR 2019 found that growing inequalities in human development “have little to do with rewarding effort, talent or entrepreneurial risk-taking”, but instead are “driven by factors deeply embedded in societies, economies and political structures”. “Far too often gender, ethnicity or parents’ wealth still determines a person’s place in society”.

Capture of the state by rich elites and commensurate declines in the bargaining power of working people have increased inequality. Real wage rises lag behind productivity growth as executive remuneration sky-rockets and regressive tax trends favour the rich and reduce public provisioning, e.g., healthcare.

Polarising megatrends

HDR 2019 identifies climate change and rapid technological innovation as two megatrends worsening inequalities, with the WSR adding urbanisation and international migration. Technical change not only supports progress, creating more meaningful new jobs, but also displaces workers and increases income inequalities.

Meanwhile, global warming is negatively impacting the lives of many, especially in the world’s poorest countries, worsening inequality. While climate action will cause job losses in carbon-intensive activities, energy saving and renewable energy are likely to increase net employment.

International migration benefits migrants, their countries of origin (due to remittances) and their host countries. But immigrant labour may increase host countries’ inequalities by taking ‘dangerous, dirty, depressed’ and low-skilled work, pushing down wages, especially for all unskilled, while professional migrations are ‘brain drains’, creating new inequalities and worsening existing ones.

COVID-19 and divergence

COVID-19 may worsen divergence among countries owing to its uneven economic impacts due to the different costs and efficacy of containment, relief and recovery measures, influenced by prior health and health care inequalities as well as state capabilities.

Low-income countries have poorer health conditions, weaker health care and social protection systems, as well as less administrative and institutional capacities, including pandemic preparedness and response capabilities. Hence, they are more vulnerable to contagion, while lacking the means to respond effectively.

Rising protectionism and escalating US-China trade tensions have aggravated challenges faced by developing countries which also face declining trade, aid, remittances, export prices and investments. ‘Vaccine nationalism’ will worsen their predicament.

COVID-19 and inequality

The COVID-19 pandemic has highlighted many existing inequalities, and may push 71 million more people into extreme poverty in 2020, the first global rise since 1998, according to the 2020 UN SDGs Report.

As 55% of the world’s population do not have any social protection, lost incomes mean poverty and hunger for many more. Before COVID-19, 690 million were chronically food insecure, or hungry, while 113 million suffered severe acute food insecurity, or near starvation, mainly due to earlier shocks.

While those in the informal sector typically lack decent working conditions and social protection, most of the workforce do not have the means or ability to work from home during ‘stay in shelter lockdowns’ as most work is not readily done remotely, even by those with digital infrastructure.

Most have struggled to survive. Relief measures have not helped many vulnerable households, while recovery policies have not done much for liquidity-constrained small and micro-enterprisesfacing problems accessing capital, credit and liquidity, even in normal times.

Meanwhile, many of the world’s billionaires have done “extremely well” during the coronavirus pandemic, growing their already huge fortunes to a record US$10.2 trillion, according to a UBS-PwC report.

Widespread school closures are not only disrupting the education of the young, but also school feeding and child nutrition. Poor access to health services is making matters worse, as already weak health systems are further overstretched.

Unexpected crossroads

UN and Oxfam reports show that growing inequality is not inevitable. The world saw sustained growth with declining inequality in the Golden Age of the 1950s and 1960s. With the neoliberal counter-revolution against development and Keynesian economics, government commitments to development and tackling inequalities have waned.

A 2020 Oxfam report notes, “only one in six countries ... were spending enough on health, only a third of the global workforce had adequate social protection, and in more than 100 countries at least one in three workers had no labour protection ... As a result, many have faced death and destitution, and inequality is increasing dramatically”.

Governments must adopt bold policies to radically reduce the gap between rich and poor and to avoid a K-shaped recovery. Internationally, improved multilateralism can help check vaccine nationalism, rising jingoist protectionism and debilitating neoliberal trade and investment deals.

Related IPS commentaries

“Rethink Food Security and Nutrition Following Covid-19 Pandemic”, 2 July 2020.

http://www.ipsnews.net/2020/07/rethink-food-security-nutrition-following-covid-19-pandemic/

“Meritocracy Legitimizes, Deepens Inequality”, 18 June 2020.

http://ipsnews.net/2020/06/meritocracy-legitimizes-deepens-inequality

“Coronavirus Exposes Global Economic Vulnerability”, 4 Mar 2020.

http://www.ipsnews.net/2020/03/coronavirus-exposes-global-economic-vulnerability/

“Billionaires Beware”, 7 January 2020.

http://www.ipsnews.net/2020/01/billionaires-beware/

“Inequality and Its Many Discontents”, 3 December 2019.

http://www.ipsnews.net/2019/12/inequality-many-discontents/

Finance Covid-19 Relief and Recovery, Not Debt Buybacks

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR: In July, the UN Secretary-General warned that a “series of countries in insolvency might trigger a global depression”. Earlier, the United Nations Conference on Trade and Development (UNCTAD) and the International Monetary Fund (IMF) had called for a US$2.5 trillion coronavirus crisis package for developing countries.

Debt distraction

In the face of the world’s worst economic contraction since the Great Depression, a sense of urgency has now spread to most national capitals and the Washington-based Bretton Woods institutions. Unless urgently addressed, the massive economic contractions due to the COVID-19 pandemic and policy responses to contain contagion threaten to become depressions.

Nevertheless, many long preoccupied with developing countries’ debt burdens and excessive debt insist on using scarce fiscal resources, including donor assistance, to reduce government debt, instead of strengthening fiscal measures for adequate and appropriate relief and recovery measures.

Most debt restructuring measures do not address countries’ currently more urgent need to finance adequate and appropriate relief and recovery packages. In the new circumstances, the debt preoccupation, perhaps appropriate previously, has become a problematic distraction, diminishing the ‘fiscal space’ for addressing contagion and its consequences.

Buybacks no solution

One problematic debt distraction is the renewed call for debt buybacks from private creditors, through an IMF-managed Brady Plan-like multilateral bond buyback facility funded by a global consortium of countries. The historical evidence is clear that bond buybacks are no panacea and neither an equitable nor efficient way to reduce sovereign debt.

The contemporary situation is quite different from the one three decades ago when US Treasury Secretary Brady’s plan successfully cut losses for the US commercial banks responsible for most debt to Latin American and other developing country governments. Hence, prospects for a comprehensive arrangement involving all creditors are far more remote now. Unsurprisingly, debt buybacks have been rare since the mid-1990s.

Furthermore, private bond markets have changed significantly from what they were during the Brady era when there was last a comparable effort involving many debtor countries. Importantly, the new creditors largely consist of pension and mutual funds, insurance companies, investment firms and sophisticated individual investors. Also, today’s creditors have less incentive to participate in sovereign debt restructurings.

Many of today’s creditors are now represented by powerful lobbies, most significantly, the International Institute of Finance (IIF). Unlike before, when their efforts focused on OECD developed economies, the IIF now actively works directly with developing country finance ministers and central bank governors.

Voluntary scheme problematic

But the debt buyback proposal, to be underwritten by a multilateral donor consortium, can inadvertently encourage hard bargaining by powerful creditors who know that money is available, while retaining the option of threatening litigation. Hence, resulting buybacks are likely to cost more. The evidence shows that a country’s secondary market debt price is higher when it has a buyback programme than otherwise.

Such an approach can also encourage trading in risky sovereign bonds promising higher returns, inadvertently sowing the seeds for another debt crisis. Private investment funds are more likely to buy such bonds if there is a higher likelihood of selling them off, while still making money from the high interest rates, even when the bonds are sold at large discounts.

The proposal’s voluntary feature also creates incentives for creditors to ‘free-ride’ by ‘holding-out’, thus undermining the likelihood of success. If the scheme is expected to effectively restore creditworthiness, then each existing creditor would hold on to the original claims, expecting market value to rise as new creditors provide relief.

Maintaining a good credit rating undoubtedly enables access to international funds at relatively lower interest rates. But low-income countries typically have poor access to international capital markets, and only get access by paying high risk premia, due to poor credit ratings.

Compared to near zero interest rates in major OECD economies, African governments pay 5~16% on 10-year bonds, while Kenya, Zambia and others pay more. Borrowing costs for developing countries issuing Eurobonds more than doubled due to high interest rates.

Also, many, if not most contemporary creditors are not primarily involved in lending money. They are therefore unlikely to respond to government requests for new loans needed to grow out of a debt crisis.

New obstacles include the greater variety of powerful creditors, the unintended incentives for free-riding inherent in voluntary debt reduction, problematic precedents as well as perverse incentives for both governments and bondholders. Perhaps most importantly, debt reduction by purely ‘voluntary’ means -- like buybacks, exit bonds, and debt-equity swaps – is unlikely to be adequate to the enormity of the problem.

Successful buybacks?

Only banks definitely gained from the Brady deals. Benefits were unclear for most debtors other than Mexico and Argentina, and particularly ineffective for Uruguay and the Philippines, where gains were paltry, if not negative.

Positive effects for economic growth were very small, as most buybacks failed to improve either market confidence in or the creditworthiness of debtor countries. Hence, even if private creditors participate, there is no guarantee that debtor countries will benefit significantly at the end of the long and complicated processes envisaged.

The 2012 Greek bond buybacks, backed by the European Commission, the European Central Bank and the IMF ‘troika’, effectively bailed out the mostly French and German banks owed money by Greece. Celebrated as a success, it neither restored Greece’s growth nor reduced its debt burden.

While bond buybacks can always be a debt restructuring option for consideration, Ecuador’s in 2008-2009 are probably the only one regarded as favourable to the debtor country. Wall Street observers suggest that Argentina’s recent initiative may also have a positive outcome.

Also, after successfully restructuring its commercial debt, the country is now better able to negotiate with its official creditors, particularly the IMF. These ‘successes’ have been exceptional, led by the countries themselves and ultimately settled on their terms, taking advantage of opportunities presented by global crises for comprehensive national debt restructuring.

Importantly, neither creditor consortia nor multilateral financial institutions were involved in coordinating or underwriting both restructurings, and hence could not impose onerous policy conditionalities. Thus, when able to take advantage of favourable conditions for negotiating strategic buybacks, debtor countries may be better able to benefit from them.

Urgent financing needed

Despite her earlier reputation as a ‘debt hawk’, new World Bank Chief Economist Carmen Reinhart recognizes the gravity of the situation and recently advised countries to borrow more: “First fight the war, then figure out how to pay for it.” Hence, in these COVID-19 times, donor money would be better utilized to finance relief and recovery, rather than debt buybacks.

Multilateral development finance institutions should resume their traditional role of mobilizing funds at minimal cost to finance development, or currently, relief and recovery, by efficiently intermediating on behalf of developing countries. They can borrow at the best available market rates to lend to developing countries which, otherwise, would have to borrow on their own at more onerous rates.