Western Finance Ruining Economies of the Rest

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Nov 19 2024 (IPS) - Western financial policies have been squeezing economies worldwide. After being urged to borrow commercial finance heavily, developing countries now struggle with contractionary Western monetary policies.

Central banks

‘Unconventional monetary measures’ in the West helped offset the world economic slowdown after the 2008 global financial crisis.

Higher interest rates have worsened contractions, debt distress, and inequalities due to cost-push inflation triggered by ‘geopolitical’ supply disruptions.

Western central bank efforts have tried to check inflation by curbing demand and raising interest rates. Higher interest rates have worsened contractionary tendencies, exacerbating world stagnation.

Despite major supply-side disruptions and inappropriate policy responses since 2022, energy and food prices have not risen correspondingly. But interest rates have remained high, ostensibly to achieve the 2% inflation target.

Although it has no rigorous basis in either theory or experience, this 2% inflation target – arbitrarily set by the New Zealand Finance Minister in 1989 to realise his “2[%] by ’92” slogan – is still embraced by most rich nations’ monetary authorities!

For over three decades, ‘independent’ central banks have dogmatically pursued this monetary policy target. Once raised, Western central banks have not lowered interest rates, ostensibly because the inflation target has not been achieved.

Independent fiscal boards and other pressures for budgetary austerity in many countries have further reduced fiscal policy space, suppressing demand, investments, growth, jobs, and incomes in vicious cycles.

Debt crises

Before 2022, contractionary tendencies were mitigated by unconventional monetary policies. ‘Quantitative easing’ (QE) provided easy credit, leading to more financialization and indebtedness.

QE also made finance more readily available to the South until interest rates were increased in 2022. As interest rates rose, pressures for fiscal austerity mounted, ostensibly to improve public finances.

Policy space and options have declined, including efforts to undertake developmental and expansionary interventions. Less government spending capacity to act counter-cyclically has worsened economic stagnation.

Comparing the current situation with the 1980s is instructive. The eighties began with fiscal and debt crises, which caused Latin America to lose at least a decade of growth, while Africa was set back for almost a quarter century.

The situation is more dire now, as debt volumes are much higher, while government debt is increasingly from commercial sources. Debt resolution is also much more difficult due to the variety of creditors and loan conditions involved.

Different concerns

With full employment largely achieved with fiscal policy after the global financial crisis, US policymakers are less preoccupied with creating employment.

Meanwhile, the US’s ‘exorbitant privilege’ enables its Treasury to borrow from the rest of the world by selling bonds. Hence, the US Fed’s higher interest rates from 2022 have had contractionary effects worldwide.

As the European Central Bank (ECB) followed the Fed’s lead, concerted increases in Western interest rates attracted funds worldwide.

Western interest rates remained high until they turned around in August 2024. Developing countries have long paid huge premiums well above interest rates in the West.

However, higher interest rates due to US Fed and ECB policies caused funds to flow West, mainly fleeing low-income countries since 2022.

However, growth and job creation remain policy priorities worldwide, especially for governments in the Global South.

Protracted stagnation

Why has world stagnation been so protracted? Although urgently needed, multilateral cooperation is declining.

Meanwhile, international conflicts have been increasingly exacerbated by geopolitical considerations. Increased unilateral sanctions driven by geopolitics have also disrupted international economic relations.

Barack Obama’s ‘pivot to Asia’ started the new Cold War to isolate and surround China. National responses to the COVID-19 pandemic worsened supply-side disruptions.

Meanwhile, the weaponisation of economic policy against geopolitical enemies has been increasingly normalised, often contravening international treaties and agreements.

Such new forms of economic warfare include denying market access despite commitments made with the 1995 establishment of the World Trade Organization.

Trade liberalisation has been in reverse gear since rich nations’ protectionist responses to the 2008 global financial crisis. Globalisation’s promise that trade integration would ensure peace among economic partners was thus betrayed.

Since the first Trump presidency, geopolitical considerations have increasingly influenced foreign direct investments and international trade.

US and Japanese investors were urged to ‘reshore’ from China with limited success, but appeals to ‘friend-shore’ outside China have been more successful.

Property and contractual rights were long deemed almost sacred. However, geopolitically driven asset confiscations have spread quickly.

Financial warfare has also ended Russian access to SWIFT financial transaction facilities and the confiscation of Russian assets by NATO allies.

The Biden administration has extended such efforts by weaponizing US industrial policy to limit ‘enemy’ access to strategic technologies.

It forcibly relocated some Taiwan Semiconductor Manufacturing Corporation operations to the US, albeit with little success.

Canada’s protracted detention of 5G pioneer Huawei founder’s daughter – at US behest – highlighted the West’s growing technology war against China.

Unsurprisingly, inequalities – both intranational and international – continue to deepen. Two-thirds of overall income inequality is international, exacerbating the North-South divide.

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Available online here: Western Finance Ruining Economies of the Rest

World Inequality Still Rising Despite Some Convergence

By Jomo Kwame Sundaram 

KUALA LUMPUR, Malaysia, Nov 6 2024 (IPS) - Despite earlier income convergence among nations, many low-income countries (LICs) and people are falling further behind. Worse, the number of poor and hungry has been increasing again after declining for decades.

After the post-Second World War ‘Golden Age’ ended over half a century ago, the world has seen unequal and uneven economic growth, industrialisation, and poverty reduction. Income divergence and convergence have involved inequalities within and among countries.

While some national-level income inequalities have fallen, North-South disparities have trended unevenly, partly due to the quantitative influence of China’s and India’s large economies.

Dividing billions

Paul Collier’s original ‘Bottom Billion’ included 58 developing countries. By 2021, they had 1.4 billion people. Failing to grow sustainably, poverty in these nations has persisted.

Despite rejecting the World Bank’s LICs and the UN’s least-developed countries, Collier and his World Bank colleagues’ revival of his Bottom Billion notion offers a valuable review of recent distributional trends.

Without supporting evidence, the authors insist most developing nations were similar at independence, with little significant difference between the Bottom Billion and the “growing” Five Billion.

Per capita incomes of most Bottom Billion countries have not risen much. Although much of the world has grown since the 1960s, many of the poorest nations have fallen further behind, albeit unevenly.

Slow economic growth and rapid population increase have reduced per capita incomes. Most Bottom Billion countries have barely grown since and are now much worse off than the ‘Lucky Billion’ of 38 rich member nations of the Organization of Economic Cooperation and Development (OECD).

Poverty is increasingly concentrated in Sub-Saharan Africa. Also, overall poverty is worsening as African populations continue to grow faster as the poor have more children to improve family circumstances.

Average output per capita of OECD member countries rose by half, from under $30,000 in 1990 to almost $45,000 in 2021. Even the poorest OECD nations are at least upper-middle-income countries.

Despite some convergence, world inequality continued to grow unevenly after 2000. The average per capita income gap between developing countries and prosperous economies has not narrowed since the turn of the century.

In recent decades, sustained high-growth episodes have mainly been in East and South Asia. Average output per capita in such ‘emerging markets’ almost tripled from under $5,000 in 1990 to nearly $15,000 by 2021.

Convergence?

Angus Maddison found divergence among world regions over the last two millennia but agreed that recent Asian growth has made convergence more plausible.

Since the Industrial Revolution two centuries ago, extended periods of divergence have been interrupted by brief episodes of convergence. Between 1870 and 1990, the ratio of the highest to the lowest incomes increased tenfold.

The remaining ‘Five Billion’ are between the Bottom and Lucky Billions. Successful ‘developing market economies’ include large, populous, rapidly growing economies like India and China, as well as small petroleum-rich states.

The Lucky Billion were already well ahead in 1990 and have remained better off since. The incomes of some of the Five Billion have risen rapidly to converge with the Lucky Billion, but the Bottom Billion are not much better off.

Some studies claim these Five Billion grew fast enough for incomes to converge worldwide. Rejecting counterclaims of divergence, the authors insist on ‘unconditional convergence’, regardless of countries’ starting positions.

Other research claims unconditional worldwide convergence as poor nations catch up. Income convergence in the 1990s and 2004-14 suggests higher primary commodity prices financed growth during the latter ‘Golden Decade’, enabling brief LIC progress, including in Africa.

This last brief growth acceleration collapsed with most commodity prices a decade ago. The Bottom Billion’s average income growth rate briefly exceeded the OECD’s during 2004-14

But the episode is wrongly seen as proof of longer-term convergence. Few developing nations have narrowed the average gap in per capita incomes with rich countries. Trends can mislead if not interpreted in context.

For years, China’s average income was below the world’s mean. This previously supported claims of worldwide convergence but will change as China’s mean income overtakes the world average.

But overall convergence can coexist with some countries and people slipping further behind while the number in ‘extreme poverty’ rises. However, data limitations and methodological disagreements make consensus unlikely.

Falling further behind

World output (in constant US dollars) more than doubled from $36 trillion in 1990 to $87 trillion by 2021. While a few developing economies have made rapid progress and more have made modest advances, many have been left behind.

As growth has been higher in East Asia and India, World Bank estimates of the poor fell from 1990 until the pandemic, although the number in ‘extreme poverty’ increased.

Despite continuing growth until the 2008 global financial crisis and declining poverty before the pandemic, many developing countries’ per capita incomes continue to fall further behind.

Hunger numbers have risen in the last decade, while the number of poor has increased since the pandemic. Ongoing economic stagnation has been worse for the Bottom Billion, who have struggled to cope with higher interest rates and capital flight since 2022.

Meanwhile, hunger numbers have been rising for a decade, while the number of poor has increased since the pandemic.

Worse, higher interest rates recently have worsened the ongoing economic stagnation.

Related IPS Articles

• Global Poverty Grows as Super-Rich Get Richer Faster

• More Poverty for the Poor

• South Suffering Due to Powerful Nations’ Policies

• Onerous Debt Making Poorest Poorer

• 1980s’ Redux? New context, Old Threats

• Neoliberal Finance Undermines Poor Countries’ Recovery

• Globalization, Inequality, Convergence, Divergence

Available online here: World Inequality Still Rising Despite Some Convergence

Another Nobel for Anglocentric Neoliberal Institutional Economics

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Oct 22 2024 (IPS) - New institutional economics (NIE) has received another so-called Nobel prize, ostensibly for again claiming that good institutions and democratic governance ensure growth, development, equity and democracy.

Daron Acemoglu, Simon Johnson, and James Robinson (AJR) are well known for their influential cliometric work. AJR have elaborated earlier laureate Douglass North’s claim that property rights have been crucial to growth and development.

But the trio ignore North’s more nuanced later arguments. For AJR, ‘good institutions’ were transplanted by Anglophone European (‘Anglo’) settler colonialism. While perhaps methodologically novel, their approach to economic history is reductionist, skewed and misleading.

NIE caricatures

AJR fetishises property rights as crucial for economic inclusion, growth and democracy. They ignore and even negate the very different economic analyses of John Stuart Mill, Dadabhai Naoroji, John Hobson and John Maynard Keynes, among other liberals.

Historians and anthropologists are very aware of various claims and rights to economic assets, such as cultivable land, e.g., usufruct. Even property rights are far more varied and complex.

The legal creation of ‘intellectual property rights’ confers monopoly rights by denying other claims. However, NIE’s Anglo-American notion of property rights ignores the history of ideas, sociology of knowledge, and economic history.

More subtle understandings of property, imperialism and globalisation in history are conflated. AJR barely differentiates among various types of capital accumulation via trade, credit, resource extraction and various modes of production, including slavery, serfdom, peonage, indenture and wage labour.

John Locke, Wikipedia’s ‘father of liberalism’, also drafted the constitutions of the two Carolinas, both American slave states. AJR’s treatment of culture, creed and ethnicity is reminiscent of Samuel Huntington’s contrived clashing civilisations. Most sociologists and anthropologists would cringe.

Colonial and postcolonial subjects remain passive, incapable of making their own histories. Postcolonial states are treated similarly and regarded as incapable of successfully deploying investment, technology, industrial and developmental policies.

Thorstein Veblen and Karl Polanyi, among others, have long debated institutions in political economy. But instead of advancing institutional economics, NIE’s methodological opportunism and simplifications set it back.

Another NIE Nobel

For AJR, property rights generated and distributed wealth in Anglo-settler colonies, including the US and Britain’s dominions. Their advantage was allegedly due to ‘inclusive’ economic and political institutions due to Anglo property rights.

Variations in economic performance are attributed to successful transplantation and settler political domination of colonies. More land was available in the thinly populated temperate zone, especially after indigenous populations shrank due to genocide, ethnic cleansing and displacement.

These were far less densely populated for millennia due to poorer ‘carrying capacity’. Land abundance enabled widespread ownership, deemed necessary for economic and political inclusion. Thus, Anglo-settler colonies ‘succeeded’ in instituting such property rights in land-abundant temperate environments.

Such colonial settlement was far less feasible in the tropics, which had long supported much denser indigenous populations. Tropical disease also deterred new settlers from temperate areas. Thus, settler life expectancy became both cause and effect of institutional transplantation.

The difference between the ‘good institutions’ of the ‘West’ – including Anglo-settler colonies – and the ‘bad institutions’ of the ‘Rest’ is central to AJR’s analysis. White settlers’ lower life expectancy and higher morbidity in the tropics are then blamed on the inability to establish good institutions.

Anglo-settler privilege

However, correct interpretation of statistical findings is crucial. Sanjay Reddy offers a very different understanding of AJR’s econometric analysis.

The greater success of Anglo settlers could also be due to colonial ethnic bias in their favour rather than better institutions. Unsurprisingly, imperial racist Winston Churchill’s History of the English-Speaking Peoples celebrates such Anglophone Europeans.

AJR’s evidence, criticised as misleading on other counts, does not necessarily support the idea that institutional quality (equated with property rights enforcement) really matters for growth, development and equality.

Reddy notes that international economic circumstances favouring Anglos have shaped growth and development. British Imperial Preference favoured such settlers over tropical colonies subjected to extractivist exploitation. Settler colonies also received most British investments abroad.

For Reddy, enforcing Anglo-American private property rights has been neither necessary nor sufficient to sustain economic growth. For instance, East Asian economies have pragmatically used alternative institutional arrangements to incentivise catching up.

He notes that “the authors’ inverted approach to concepts” has confused “the property rights-entrenching economies that they favor as ‘inclusive’, by way of contrast to resource-centered ‘extractive’ economies.”

Property vs popular rights

AJR’s claim that property rights ensure an ‘inclusive’ economy is also far from self-evident. Reddy notes that a Rawlsian property-owning democracy with widespread ownership contrasts sharply with a plutocratic oligarchy.

Nor does AJR persuasively explain how property rights ensured political inclusion. Protected by the law, colonial settlers often violently defended their acquired land against ‘hostile’ indigenes, denying indigenous land rights and claiming their property.

‘Inclusive’ political concessions in the British Empire were mainly limited to the settler-colonial dominions. In other colonies, self-governance and popular franchises were only grudgingly conceded under pressure.

Prior exclusion of indigenous rights and claims enabled such inclusion, especially when surviving ‘natives’ were no longer deemed threatening. Traditional autochthonous rights were circumscribed, if not eliminated, by settler colonists.

Entrenching property rights has also consolidated injustice and inefficiency. Many such rights proponents oppose democracy and other inclusive and participatory political institutions that have often helped mitigate conflicts.

The Nobel committee is supporting NIE’s legitimisation of property/wealth inequality and unequal development.

Rewarding AJR also seeks to re-legitimise the neoliberal project at a time when it is being rejected more widely than ever before.

Related IPS Articles:

• Industrial Policy, East or West, for Development or War?

• Imperialism, Globalisation and Its Discontents*

• The Best Law Capital Can Buy

• Economic Ghosts Block Post-Lockdown Recovery

• Neoliberal Reforms Strengthening Monopoly Power and Abuses

• Is Good Governance Key To Eliminating Poverty?

• Ignore Standard Good Governance Prescriptions To Accelerate Development

• Is Good Governance Good For Development?

Available online here: Another Nobel for Anglocentric Neoliberal Institutional Economics