Rich Nations, IMF Deepen World Stagnation

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Dec 13 2023 (IPS) - With the US Fed raising interest rates, the world economy is slowing as debt distress spreads across the global South, increasing poverty worldwide to pre-pandemic levels, with the poorest countries faring worst.

Extreme poverty continues to be high and is now worse than before the pandemic in low-income countries (LICs) and among those affected by fragility, violence and conflict. The promise of eradicating poverty worldwide by 2030 has become unachievable.

The Bretton Woods institutions’ (BWIs) annual meetings in Marrakech in October were only the second-ever in Africa. But the rich nations-dominated BWIs failed yet again to rise to the challenges of our times, setting Africa and the global South even further back.

Instead of fostering cooperation to address the causes and effects of the contemporary catastrophe, neither the International Monetary Fund nor the World Bank governors could agree on joint communiques due to the greater politicisation of multilateral fora.

Indebtedness immobilises governments

Indebtedness and restrictive creditor rules prevent governments from spending more counter-cyclically to overcome the many contractionary tendencies of recent times, besides preventing them from addressing looming social and environmental crises.

The G20’s largest twenty economies have urged strengthening “multilateral coordination by official bilateral and private creditors … to address the deteriorating debt situation and facilitate coordinated debt treatment for debt-distressed countries”.

But its Common Framework to restructure debt has been roundly criticised by civil society, think tanks and even the World Bank on many grounds, including the paltry concessional credit relief offered to a few of the very poorest countries.

In contrast, the G24 caucus of developing countries at the BWIs has emphasised the need for “durable debt resolution measures while collaborating on resolving the structural issues leading to such vulnerabilities.”

But all those advocating purported solutions are not even trying to ensure fiscal space and public spending capacity for counter-cyclical efforts, let alone achieve the Sustainable Development Goals and national development objectives.

SurchargesThe IMF currently imposes additional charges on countries that do not quickly clear their debts to the Fund. Besides the usual fees and interest, borrowing countries paid over $4 billion in such surcharges in 2020-22, during the COVID-19 pandemic.

Surcharges will cost debt-distressed countries about $7.9 billion over six years. The G24 has emphasised that surcharges are pro-cyclical and regressive, especially with monetary tightening.

Governments have undertaken contractionary policies and cut imports for lack of foreign exchange. This deepens the problems of heavily indebted poor countries who cannot but count on the Fund for relief and solutions.

At Marrakech, the governing International Monetary and Financial Committee decided to “consider a review of surcharge policies”. The G24 called for “a suspension of surcharges while the review – which we hope will lead to substantial permanent reduction or complete elimination – is being conducted.”

Rich nations have been divided over surcharges. With Ukraine now among the top surcharge payers, following civil society criticisms, the Biden administration’s refusal to review surcharges in 2022 was heavily criticised by the US Congress.

Deepening austerityIMF fiscal austerity measures of the 1980s returned with a vengeance after the 2008 global financial crisis, and then again during the Covid-19 pandemic from 2020. Most Fund loans require cutting the public sector wage bill (PSWB), the budget line to pay employees.

Most wage earners in many LICs, including nurses, teachers and other social service workers, work for the state, directly or indirectly. Although much needed, these employees have been more likely to be targeted by such budget cuts.

PSWB cuts may involve hiring or wage freezes, or limiting, or even cutting wages. These inevitably undermine government capacities and services. Fiscal consolidation has also involved raising more indirect, consumption taxes, and tax exemptions, e.g., for essential goods such as food.

In 38 countries with over a billion people, loan conditionalities during 2020-22, the three years of the Covid-19 pandemic, meant regressive tax reforms and public spending cuts. PSWB and fuel or electricity subsidy cuts are also common demands worsening economic contractions.

Austerity bound to failBut the IMF’s own research suggests such austerity policies are generally ineffective in reducing debt, their ostensible purpose. The April 2023 IMF World Economic Outlook acknowledged austerity programmes and fiscal consolidations “do not reduce debt ratios, on average”. Yet, its Fiscal Monitor still demands “fiscal tightening” of most developing countries.

The new IMF-World Bank debt sustainability framework sets the LICs’ external debt-to-GDP ratio limit at 30% or 40%. It insists debt-distressed economies must have lower ratios than ‘strong’ countries, effectively further penalising the weak and vulnerable.

Instead of enabling consistently counter-cyclical macroeconomic frameworks, the IMF’s current short-termist approach is mainly preoccupied with annual, or worse, quarterly balances, mimicking corporate reporting practices.

Such short-termism further limits fiscal space, effectively preventing or deterring public sector investments requiring longer-term macroeconomic frameworks to realise benefits. This discourages ‘patient’ medium- to long-term investments required for national economic planning and transformation, essential for sustainable development.

Restrictive debt and fiscal targets have meant even less public investment. This is typically required of borrowing countries as a credit conditionality. Annual IMF Article IV consultations cause other countries to also accept similar constraints to avoid Fund disapproval.

While a few better-off economies enjoy full employment, most countries face further economic contraction, not least due to interest rate hikes led by the US Fed and their many effects. Instead of being part of the problem, the IMF should be part of the solution.

Related IPS Articles

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·                IMF, World Bank Must Support Developing Countries’ Recovery

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·                Global Economy Still Slowing, Dangerously Vulnerable

·                Countercyclical Fiscal Policy Needed to Counter Global Economic Downturn

·                Bretton Woods Institutions: Enforcers, Not Saviours?

·                https://www.ipsnews.net/2023/12/rich-nations-imf-deepen-world-stagnation/

Big Cons: How Consultancy Firms Undermine Governments

By Ong Kar Jin and Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Dec 6 2023 (IPS) - Greater government reliance on consulting companies has greatly enriched them while also undermining state capacities, capabilities, national economies, progress, governance and legitimacy.

The Big ConOver recent decades, policy consultancy has gradually gained more public attention. With the COVID-19 pandemic, consultancies were paid billions, with meagre results, leaving even less for millions of others desperately struggling to cope.

In The Big Con: How the Consulting Industry Weakens our Businesses, Infantilizes our Governments and Warps our Economies, Mariana Mazzucato and Rosie Collington explain how consultancies persuade governments and corporations to use their services, with problematic consequences.

Many argue that governments and corporations need such expertise as they cannot be expected to be good at everything, let alone familiar with the latest trends and challenges. Others argue consultancies provide much-needed second opinions, especially when organisations have lost their capacities and capabilities.

The Big Con argues their clients rarely get what they most need. Heavy dependence on consultancies also compromises accountability and retards needed innovation. Consequently, governments allow their capacities and capabilities to deteriorate, with consultancy firms profitably filling the gap.

‘Voluntary’ dependencyThe Big Con provides many examples of problems arising from becoming “overly reliant on expensive contracts”. These include McKinsey’s role in France’s bungled vaccine programme, and Deloitte’s in the UK’s botched Test and Trace programme.

Consultancy firms have taken over many public services in France. The trend began in 2007 when Nicolas Sarkozy became president, promising to “make the French state cost-efficient”. His government gave 250 million euros ($269m) in contracts to management consultancies like McKinsey, Deloitte and the Boston Consultancy Group (BCG).

Under Emmanuel Macron, consultancy firms received 2.4 billion euros ($2.6bn) in government contracts in 2018. They have become involved in various public services, including France’s COVID-19 vaccine rollout and controversial pension reforms.

The UK spends more on consultants than all countries other than the US. Rather than have its National Health Service involved in its test-and-trace programme, ministers and civil servants turned to consultancies. At one point, over £1m was spent on consultants daily, with some ‘senior’ advisers billing over £6,000 per diem!

One consultant confessed, “It just seemed like every project had loads of wandering Deloitte people … the sheer volume of them that were around created the situation of these zombie emails just arriving all the time … taking our attention away from actual work.”

As its bankruptcy proceedings started in 2016, Puerto Rico hired McKinsey to advise a US federal oversight board. The team, led by recent US Ivy League graduates, was to prepare an ‘aspirational vision’ for the US island territory. Its recommendations included privatising state-owned enterprises, ‘rightsizing’ job cuts, and reducing social, especially labour protection.

While consultancies are often touted as involving experienced experts, most client governments, especially from developing countries, often host young graduates of reputable institutions, mainly adept at using the latest jargon and making impressive presentations.

Losing capacities and capabilitiesMost governments have not tried hard to enhance their capacities and capabilities, e.g., to develop their public information and communications (ICT) or digital technology expertise. Instead, they ‘outsource’, depending on consultancies, even for sensitive strategic policy matters.

A book review suggests, “One also cannot help but gain the impression of the big consultancies as vultures, feasting on calamitous challenges like Covid-19, Brexit and climate change. Meanwhile, they pose as disinterested and expert helping hands.”

Management consultants are increasingly widely used by both governments and corporations, giving the impression of expert authority for mooted reforms. As a British minister noted, governments have been ‘infantilised’ by relying on management consultants.

The Big Con notes, “The more governments and businesses outsource, the less they know how to do.” Consultancies have eroded government and business capacities and capabilities. The presumption seems to be that clever young consultants, coming from abroad, know much better than experienced employees, and “knowledge can be purchased, as if off a shelf”.

So why have governments accepted all this? As the book’s title implies, successful consulting requires gaining customers’ confidence, e.g., persuading them that consultants have the answers, regardless of whether this is true.

Some decision-makers also simply want to be able to pass on responsibility for policy solutions, as it is generally politically easier to blame an external party, e.g., consultants, than to take responsibility. This is especially useful if policy recommendations are likely to be unpopular, e.g., involving downsizing or cuts.

Growing conThe Big Con notes that a con gains momentum with seeming success. The authors argue the bigger the consultancies and their scope of work, the weaker governments become. As governments lose confidence in their own abilities, consultancies become the default solution.

Some governments have become so taken with consulting that they have set up ‘internal’ consultancy arms, e.g., Malaysia set up PEMANDU, PADU and other entities for this purpose. This is part of a wider trend of increasing corporatisation of public institutions to pursue ‘efficiency’.

Perhaps urged by major donors, the United Nations Development Programme (UNDP) has championed ‘entrepreneurship’, ‘impact investing’ and ‘accelerating social enterprises’ in recent years. It now has labs, team leads, and strategic innovation units, all spouting corporate buzzwords.

This turn reflects growing faith in what Daniel Greene terms the ‘access doctrine’, i.e., the belief that poverty and other social problems can be simply overcome by new technologies and technical skills, regardless of their complexities. Policymakers increasingly embrace and proselytise such technical fixes, ensuring consultants’ status as the cult’s new high priests.

Threatened by fiscal austerity and criticisms of being obsolete, public institutions increasingly embrace the access doctrine. They shift resources to foster ‘startups’ or ‘accelerating innovation’ to retrieve legitimacy and secure much-needed resources as public spending is threatened by fiscal austerity.

By redefining poverty as a problem of technology access, consultants reframe problems as seemingly more manageable for staff, politicians, other decision-makers, donors and others. The technological fix fetish has provided a powerful rationale for cutting social protections, replacing them with upskilling programmes and entrepreneurship ‘boot camps’.

Neoliberal consultanciesWith the counter-revolution against Keynesian macroeconomics and development economics, policymakers embraced ostensibly market and private solutions from the 1980s.

As state-owned enterprises were privatised, the public sector was expected to function like businesses. Governments embraced ‘performance-related pay’ and cost-benefit analyses to promote private sector values in the public realm.

After Margaret Thatcher became UK prime minister in 1979, her party chairman declared: “The management ethos must run right through our national life – private and public companies, civil service, nationalised industries, local government, the National Health Service.”

Such policies were mimicked in many developing countries, either for access to concessional finance or voluntarily, as the Washington Consensus gained hegemony in policymaking circles. The consultancy cult’s osmosis into public institutions in recent decades as well as its more novel recent iterations are their consequences.

The book ends with a call to change the role of consultancies, arguing they have caused the public sector to become less capable and innovative. Investing in public sector expertise will be necessary to retrieve the space ‘voluntarily’ ceded to ‘the big con’.

https://www.ipsnews.net/2023/12/big-cons-consultancy-firms-undermine-governments/

Rich Distort Climate Problems, Offer Self-Serving Solutions

By Jomo Kwame Sundaram and Yin Shao Loong

KUALA LUMPUR, Malaysia, Nov 29 2023 (IPS) - Many in the wealthy West have misrepresented the causes of global warming, offering false solutions while claiming the high moral ground. This distracts attention from how they became wealthy while emitting greenhouse gases.

Tragedy or farce?

Growing greenhouse gas (GHG) emissions in the industrial age have caused global warming, with their accumulation continuing to accelerate despite being close to exceeding 1.5°C warming and its associated tipping points.

This is sometimes depicted as due to the failure to sustainably manage the atmosphere as a shared resource. The ‘tragedy of the commons’ refers to a community’s inability to manage a common resource sustainably.

One popular example is of individual herders benefiting by grazing more of their own animals on a limited piece of commonly shared land. Such selfish behaviour will eventually exhaust the grazing pasture, the shared common resource.

To address ‘tragedy of the commons’ claims, mainstream economists have advocated assigning property rights to more directly experience the negative ‘externalities’ or consequences due to excessive use of the limited resources owned.

Developed countries have long exhausted their ‘fair share’ of the world’s ‘carbon budget’. Climate scientists identified 350 parts per million (ppm) of carbon dioxide as the upper limit to stabilise the climate to prevent disastrous climate change.

Apportioning this carbon budget as quotas among the world’s countries has been described as allocating emission ‘rights’. The global North used up this quota in 1969, then overshot its 1.5ºC quota in 1986, and 2.0ºC quota in 1995!

Such quotas refer to the maximum accumulated carbon emissions, fairly shared among all countries, to ensure world temperatures do not rise over the pre-industrial age average by more than 1.5°C or 2.0°C in 2100 respectively.

Even if the global North achieves ‘net-zero’, their cumulative emissions alone would still be thrice their 1.5°C ‘fair share’. By contrast, at ‘net-zero’, the global South’s accumulated emissions would only use half its 1.5°C fair share.

Hence, the claim that developing countries lack ‘ambition’, compared to the global North, by not pursuing the same climate policies – such as carbon pricing – is misleading.

The European Union’s Carbon Border Adjustment Mechanism (CBAM) makes such claims. It is not only onerous but also profoundly biased. The EU has been the world’s second-largest GHG emitter historically, long exceeding its ‘fair share’ of using the atmosphere as a carbon sink.

European solution, others pay

Likely free riding poses a related problem. If GHG emissions are sufficiently penalised, global warming mitigation costs can be passed to individual greenhouse gas (GHG) emitters.

The European Union (EU) has the world’s oldest and largest Emissions Trading System (ETS). It functions by capping carbon emissions and auctioning GHG emission quotas to companies, who can trade such emission ‘rights’ among themselves.

The ETS claims to be raising costs or penalties for GHG emissions to reduce them by 55% by 2030. Thus penalising emissions especially threatens energy-intensive industries which emit more GHGs.

In response, some industries threatened to move abroad to less environmentally regulated countries. The EU gave free quota allocations to GHG emissions-intensive industries to gain political acceptance by cutting the costs of such transitions.

This is partly why the ETS can only claim credit for a mere 0% to 1.5% in annual GHG emissions reductions, failing spectacularly to reduce emissions rapidly.

Can carbon taxes save us?

To reduce GHG emissions by 55% by 2030, the EU’s new CBAM policy package promises to gradually phase out free ETS allocations.

To protect the profits of the EU’s GHG-emitting industries, importers will be required to pay higher prices. These are supposed to incorporate carbon taxes, to deter high GHG-emitting imports, especially from developing nations.

Developing countries’ exporters are required to pay carbon prices on their exports at rates determined by importing countries. Such measures are said to be fair, ostensibly by ‘levelling the playing field’, but will actually mainly burden developing country exporters.

An UNCTAD study shows how CBAM discriminates against low- and middle-income countries. It found CBAM will only reduce worldwide carbon emissions by 0.1%!

The CBAM will thus get developing countries to pay EU members for their GHG-emitting exports. Such ‘carbon taxes’ may even be used to help finance the EU’s own green transition or for purposes unrelated to climate.

Ostensibly to address global warming, the new rules are very protectionist. The WTO dispute settlement tribunal may not approve them if it is allowed to function after years of being blocked by the US. But the outcome is uncertain as this would be the first time a climate measure would be so tested.

Freeriding?

Historically, rich nations have emitted much more GHGs. On a per capita basis, this is still the case today. Despite such huge differences in GHG emissions, and ignoring developing countries’ limited means, rich nations want to impose the same rules and requirements on them.

As Elinor Ostrom has shown, communities worldwide have avoided the ‘tragedy of the commons’ historically. They governed shared resources to meet current needs while sustaining them for future generations.

Many communities devised arrangements to prevent the exhaustion of common or shared resources. But many of these were subverted by colonialism to favour foreign powers at the expense of those ruled.

CBAM also contradicts the UN Framework Convention on Climate Change (UNFCCC) principle of ‘common but differentiated responsibilities’ (CBDR). CBDR refers to the different responsibilities of developed and developing countries for causing the climate crisis and addressing it.

Recognising CBDR, the UNFCCC’s Kyoto Protocol put the primary burden for mitigation on developed countries. Rich nations rejected and undermined CBDR, delaying climate action by decades. Most Western nations made little effort to meet their obligations while accusing others of freeriding on them.

Of course, this ignores rich nations effectively freeriding on developing countries for centuries through colonialism, domination and exploitation. And the urgent action now needed to address the climate crisis has become the new pretext for rich nations to insist everyone must sacrifice equally.

Self-serving solutions

Most developing countries urgently seek – but cannot get – affordable climate financing. They prioritise climate adaptation, rather than mitigation which is what most of the limited climate finance resources from the global North is earmarked for.

To be sure, claims of ‘carbon leakage’ have been very moot. The transition anxieties of high-emission industries are best addressed by targeted policies to rapidly decarbonise these industrial processes.

Rich country subsidies have bypassed the distributional equity and political problems posed by carbon pricing or taxation. For instance, Biden’s Inflation Reduction Act (IRA) subsidies promote renewable energy and electric vehicles by lowering their costs to consumers.

Surely, by now, the world has learnt how to better cooperate to save ourselves.

YIN Shao Loong is Deputy Director of Research at the Khazanah Research Institute where he focuses on climate change and industrial policy.

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·                Rich Distort Climate Problems, Offer Self-Serving Solutions