April Fool’s inflation medicine threatens progress

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR. The world economy is on the brink of outright recession, according to the International Monetary Fund (IMF). The Ukraine war and sanctions have scuttled recovery from the COVID-19 pandemic.

Over 80 central banks have already raised interest rates so far this year. Except for the Bank of Japan governor, major central bankers have reacted to recent inflation by raising interest rates. Hence, stagflation is increasingly likely as rising interest rates slow the economy, but do not quell supply-side cost-push inflation.

IMF U-turn unexplained

The IMF chief economist recently advised, “Inflation at current levels represents a clear risk for current and future macroeconomic stability and bringing it back to central bank targets should be the top priority for policymakers”.

While acknowledging the short-term costs of raising interest rates, he has never bothered to explain why inflation targets should be considered sacrosanct regardless of circumstances. Simply asserting inflation will be more costly if not checked now makes for poor evidence-based policy making.

After all, only a month earlier, on 7 June, the IMF advised, “Countries should allow international prices to pass through to domestic prices while protecting households that are most in need”.

The Fund recognized the major sources of current inflation are supply disruptions – first due to pandemic lockdowns disrupting supply chains, and then, delivery blockages of food, fuel and fertilizer due to war and sanctions.

US Fed infallible?

Without explaining why, US Federal Reserve Bank Chair Jerome Powell insists on emulating his hero, Paul Volcker, Fed chair during 1979-87. Volcker famously almost doubled the federal funds target rateto nearly 20%.

Thus, Volcker caused the longest US recession since the 1930s’ Great Depression, raising unemployment to nearly 11%, while “the effects of unemployment, on health and earnings of sacked workers, persisted for years”.

Asked at a US Senate hearing if the Fed was prepared to do whatever it takes to control inflation – even if it harms growth – Powell replied, “the answer to your question is yes”.

But major central banks have ‘over-reacted’ time and again, with disastrous consequences. Milton Friedman famously argued the US Fed exacerbated the 1930s’ Great Depression. Instead of providing liquidity to businesses struggling with short-term cash-flow problems, it squeezed credit, crushing economic activity.

Similarly, later Fed chair Ben Bernanke and his co-authors showed overzealous monetary tightening was mainly responsible for the 1970s’ stagflation. With prices still rising despite higher interest rates, stagflation now looms large.

North Atlantic trio

Most central bankers have long been obsessed with fighting inflation, insisting on bringing it down to 2%, despite harming economic progress. This formulaic response is prescribed, even when inflation is not mainly due to surging demand.

Powell recently observed, “supply is a big part of the story”, acknowledging the Ukraine war and China’s pandemic restrictions have pushed prices up.

While admitting higher interest rates may increase unemployment, Powell insists meeting the 2% target is “unconditional”. He asserted, “we have the tools and the resolve to get it down to 2%”, insisting “we’re going to do that”.

While recognizing “very big supply shocks” as the primary cause of inflation, Bank of England (BOE) Governor Andrew Bailey also vows to meet the 2% inflation target, allowing “no ifs or buts”.

While European Central Bank President Christine Lagarde does not expect to return “to that environment of low inflation”, admitting “inflation in the euro area today is being driven by a complex mix of factors”, she insists on raising “interest rates for as long as it takes to bring inflation back to our [2%] target”.

April Fools?

Much of the problem is due to the 2% inflation targeting dogma. As the then Governor of the Reserve Bank of New Zealand – the first central bank to adopt a 2% inflation target – later admitted, “The figure was plucked out of the air”.

Thus, a “chance remark” by the NZ Finance Minister – during “a television interview on April 1, 1988 that he was thinking of genuine price stability, ‘around 0, or 0 to 1 percent’” – has become monetary policy worldwide!

Powell also acknowledged, “Since the pandemic, we’ve been living in a world where the economy has been driven by very different forces”. He confessed, “I think we understand better how little we understand about inflation.”

Meanwhile, Powell acknowledges how changed globalization, demographics, productivity and technical progress no longer check price increases – as during the ‘Great Moderation’.

Bailey’s resolve to get inflation to 2% is even more shocking as he admits the BOE cannot stop inflation hitting 10%, as “there isn’t a lot we can do”.

Although it has no theoretical, analytical or empirical basis, many central bankers treat inflation targeting as universal best practice – in all circumstances! Thus, despite acknowledging supply-side disruptions and changed conditions, they still insist on the 2% inflation target!

Interest rate, blunt tool

Central bankers’ inflation targeting dogma will cause much damage. Even when inflation is rising, raising interest rates may not be the right policy tool for several reasons.

First, the interest rate only addresses the symptoms, not the causes of inflation – which can be many. Second, raising interest rates too often and too much can kill productive and efficient businesses along with those less so.

Third, by slowing the economy, higher interest rates discourage investment in new technology, skill-upgrading, plant and equipment, adversely affecting the economy’s long-term potential.

Fourth, higher interest rates will raise debt burdens for governments, businesses and households. Borrowings accelerated after the 2008-09 global financial crisis, and even more during the pandemic.

Monetary tightening also constrains fiscal policy. A slower economy implies less tax revenue and more social provisioning spending. Higher interest rates also raise living costs as households’ debt-servicing costs rise, especially for mortgages. Living costs also rise as businesses pass on higher interest rates to consumers.

Policy innovation

The recent inflationary surge is broadly acknowledged as due to supply shortages, mainly due to the new Cold War, pandemic, Ukraine war and sanctions.

Increasing interest rates may slow price increases by reducing demand, but does not address supply constraints, the main cause of inflation now. Anti-inflationary policy in the current circumstances should therefore change from suppressing domestic demand, with higher interest rates, to enhancing supplies.

Raising interest rates increases credit costs for all. Instead, financial constraints on desired industries to be promoted (e.g., renewable energy) should be eased. Meanwhile, credit for undesirable, inefficient, speculative and unproductive activities (e.g., real estate and share purchases) should be tightened.

This requires macroeconomic policies to support economic diversification, by promoting industrial investments and technological innovation. Each goal needs customized policy tools.

Instead of reacting to inflation by raising the interest rate – a blunt one-size-fits-all instrument indeed – policymakers should consider various causes of inflation and how they interact.

Each source of inflation needs appropriate policy tools, not one blunt instrument for all. But central bankers still consider raising interest rates the main, if not only policy against inflation – a universal hammer for every cause of inflation, all seen as nails.

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Neo-colonial currency enables French exploitation

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR. Colonial-style currency board arrangements have enabled continuing imperialist exploitation decades after the end of formal colonial rule. Such neo-colonial monetary systems persist despite modest reforms.

In 2019, Italian Deputy Prime Minister Luigi Di Maio accused France of using currencyarrangements to “exploit” its former African colonies, “impoverishing Africa” and causing refugees to “leave and then die in the sea or arrive on our coasts”.

Neo-colonial CFA

As France ratified the Bretton Woods Agreement (BWA) on 26 December 1945, it established the Colonies Françaises d’Afrique (CFA) franc zone, enabling France to update pre-war colonial monetary arrangements.

The ostensible intent of the ‘Franc of the French Colonies of Africa’ (FCFA) was to cushion its colonies from the drastic French franc (FF) devaluation required to peg its value to the US dollar, as agreed at Bretton Woods.

Then French finance minister René Pleven claimed, “In a show of her generosity and selflessness, metropolitan France, wishing not to impose on her faraway daughters the consequences of her own poverty, is setting different exchange rates for their currency”.

In December 1958, the CFA franc became the ‘Franc of the Communauté Financière Africaine’ (still FCFA). In 1960, President Charles de Gaulle made CFA membership a pre-condition for French decolonization in West and Central Africa.

The CFA recently involved 14 mainly Francophone sub-Saharan African countries belonging to two currency unions, both using the CFA franc (FCFA): the West African Economic and Monetary Union (UEMOA) and the Economic and Monetary Community of Central Africa (CEMAC).

UEMOA comprises Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo, while CEMAC includes Cameroon, the Central African Republic, Republic of Congo, Gabon, Equatorial Guinea and Chad.

France’s ‘incontestable advantages’

De Gaulle’s finance minister, and later President, Valéry Giscard d’Estaing correctly complained about the US dollar’s “exorbitant privilege”. But he seemed blissfully ignorant of the French Socio-Economic Council’s 1970 report on the CFA’s “incontestable advantages for France”.

First, France could pay for imports from CFA countries with its own currency, saving foreign exchange for other international obligations. This became especially advantageous when the FF was weak and unstable.

Second, the French Treasury often paid negative real interest rates for CFA reserves. Thus, CFA countries have been paying it to hold their foreign reserves! Investment income is then deployed as French aid to CFA countries in the form of loans to be repaid with interest!

But CFA countries themselves cannot use their own reserves as collateral to secure credit as these are held by the French Treasury. Thus, during the global financial crisis, they had to borrow, mainly from France, at commercial rates.

Third, by supplying FCFA at the fixed rate, seigniorage – the difference between the cost of issuing currency and its face value – has effectively accrued to France and, more recently, the European Central Bank.

For every euro so deposited, the FCFA equivalent is issued and made available to the depositing country. When France joined the euro in 1999, one euro fetched 6.55957 FFs, or 655.957 FCFA.

CFA economies have thus effectively ceded monetary sovereignty to the French Treasury. Unsurprisingly, France’s monetary control has served its own, rather than CFA members’ economic interests.

Fourth, French companies operating in the CFA have been able to freely repatriate funds without incurring any foreign exchange risk. Worse, when CFA countries have faced foreign exchange problems, France has made things worse!

CFA elites, French patrons

The CFA not only benefits France, but also elites in CFA countries. Their appetite for faux French lifestyles explains their preference for overvalued exchange rates.

The CFA also facilitates financial outflows, no matter how illicitly acquired, as long as they do not challenge the neo-colonial status quo. For decades, all manner of French governments have consistently backed these elites, typically supporting despotic rule.

When its interests in Africa have been threatened, France has unilaterally deployed combat troops and superior armaments, always insisting on its ‘legitimate’ right to do so.

France is alleged to be behind military coups and even assassinations of prominent personalitiescritical of its interests, policies and stratagems. On 13 January 1963, only two days after issuing its own currency, Togo President Sylvanus Olympio was killed in a coup.

In 1968, six years after withdrawing Mali from the CFA, its independence leader and first President, Modibo Keita was ousted in a coup after trying to develop its economy along more independent and progressive lines.

Plus ça change, plus c’est la même chose

When the CFA was first created in 1945, the colonies deposited 100% of their foreign exchange reserves in a special French Treasury ‘operating account’. This requirement was reduced to 65% from 1973 to 2005, and then to 50%, plus an additional 20% for daily foreign currency transactions or “financial liabilities”.

Thus, CFA states are still deprived of most of their foreign exchange earnings, retaining only 30%! Meanwhile, Banque de France holds 90% of CFA gold reserves, making it the world’s fourth largest holder of gold reserves.

The FCFA arrangement was supposed to end for UEMOA countries from 20 May 2020. While only six former French colonies in Central Africa formally remain in the CFA, the reform is less than meets the eye.

France remains UEMOA’s ‘financial guarantor’, appointing an ‘independent’ member to its central bank board. Meanwhile, the proposed West African ‘eco’ currency is still not yet in circulation, while the transfer of euro reserves from the French Treasury to the West African Central Bank has yet to happen.

After its creation, FCFA parity was set at 50 to one FF. On 12 January 1994, the FCFA was devalued by half, as demanded by the International Monetary Fund, with support from France. This followed problems due to commodity price slumps.

The devaluation shocked CFA economies as the FCFA’s value fell by half overnight! This pushed up prices of imported goods, including food, while increasing the FF’s purchasing power.

Meanwhile, eight FF devaluations between 1948 and 1986 against the US dollar and gold have also meant great losses to the value of CFA reserves. CFA countries have ostensibly benefitted from anchoring the FCFA to a supposedly stable FF. But in fact, the FF experienced a 70% cumulative devaluation over this period!

Less inflation, no development

CFA advocates also claim that pegging the West and Central African FCFA to the FF, and later the euro, has ensured less inflation than in other African countries. But CFA members “traded decreased inflation for fiscal restraint and limited macroeconomic options”.

The cost of lower inflation “has been slower per capita growth and diminished poverty reduction”. They have had lower growth, on average, than in non-CFA countries. Eleven of the 14 CFA member states are least developed countries at the bottom of UNDP’s Human Development Index.

The CFA has also limited credit for economic growth and industrialization. This has been seen in lower credit-GDP ratios of between 10% to 25% in CFA countries, against over 60% in other Sub-Saharan African countries. These lower ratios also reflect weak financial and banking sectors, unable to be effectively developmental.

The CFA has also not enhanced trade among members. After six decades, trade among CEMAC and UEMOA members averaged 4.7% and 12% of total trade respectively – much less than, say, ASEAN’s 23%. Low intra-CFA trade and pegged exchange rates have ensured persistent balance of payments imbalances.

The currency arrangement also encourages capital outflows. Aggregate net capital flight out of CFA countries during 1970-2010 averaged $83.5 billion, 117% of combined GDP! Unregulated capital transfers between CFA countries and France have enabled much more capital flight than elsewhere during 1970-2015.

No sovereignty, no development

Socialist Party President François Mitterrand was no less neo-colonial. He warned that without control of Africa, France would become irrelevant in the 21st century.

In January 2001, French President Jacques Chirac admitted, “While speaking of Africa, we must check our memory. We started draining the continent four and a half centuries ago with the slave trade. Next, we discovered their raw materials and seized them.

“Having deprived Africans of their wealth, we sent in our elites who destroyed their culture. Now, we are depriving them of their brains thanks to scholarships … [as] the most intelligent students do not go back to their countries … In the end, noticing that Africa is not in a good state … we are giving lectures”.

In 2008, Chirac noted, “We have to be honest and acknowledge that a big part of the money in our banks comes precisely from the exploitation of the African continent. Without Africa, France will slide down [to] the rank of a Third World power.”

Claiming to be from a different generation, President Emmanuel Macron promised to end such neo-colonial arrangements. Yet, at the 2017 G20 Summit, he patronizingly declared Africa’s problem “civilizational”.

Such neo-colonial condescension refuses to acknowledge France’s continued exploitation of its West and Central African ex-colonies. Clearly, CFA currency arrangements have limited their economic policy space and progress.

Colonial style exploitation has thus continued in Africa long after decolonization. Unsurprisingly, Chad President Idriss Deby declared, “we must have the courage to say there is a cord preventing development in Africa that must be severed”.

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Africa taken for ‘neo-colonial’ ride

Africa taken for ‘neo-colonial’ ride

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR. Like so many others, Africans have long been misled. Alleged progress under imperialism has long been used to legitimize exploitation. Meanwhile, Western colonial powers have been replaced by neo-colonial governments and international institutions serving their interests.

‘Shithole’ pots of gold 

US President Donald Trump’s “shitholes”, mainly in Africa, were and often still are ‘pots of gold’ for Western interests. From 1445 to 1870, Africa was the major source of slave labour, especially for Europe’s ‘New World’ in the Americas. 

Walter Rodney’s How Europe Underdeveloped Africa noted “colonised Africans, like pre-colonial African chattel slaves, were pushed around into positions which suited European interests and which were damaging to the African continent and its peoples.” 

The ‘scramble for Africa’ from the late nineteenth century saw European powers racing to secure raw materials monopolies through direct colonialism. Western powers all greatly benefited from Africa’s plunder and ruin. 

European divide-and-conquer tactics typically also had pliant African collaborators. Colonial powers imposed taxes and forced labour to build infrastructure to enable raw material extraction. 

Racist ideologies legitimized European imperialism in Africa as a “civilizing mission”. Oxford-trained, former Harvard history professor Niall Ferguson – an unabashed apologist for Western imperialism – insists colonialism laid the foundations for modern progress. 

Richest, but poorest and hungriest!

A recent blog asks, “Why is the continent with 60% of the world’s arable land unable to feed itself? … And how did Africa go from a relatively self-sufficient food producer in the 1970s to an overly dependent food importer by 2022?”

Deeper analyses of such uncomfortable African realities seem to be ignored by analysts influenced by the global North, especially the Washington-based international financial institutions. UNCTAD’s 2022 Africa report is the latest to disappoint. 

It does not guide African governments on how to actually implement its long list of recommendations given their limited policy space, resources and capabilities. Worse, their proposals seem indistinguishable from an Africa-oriented version of the discredited neoliberal Washington Consensus.

With 30% of the world’s mineral resources and the most precious metal reserves on Earth, Africa has the richest concentration of natural resources – oil, copper, diamonds, bauxite, lithium, gold, tropical hardwood forests and fruits. 

Yet, Africa remains the poorest continent, with the average per capita output of most countries worth less than $1,500 annually! Of 46 least developed countries, 33 are in Africa – more than half the continent’s 54 nations. 

Africa remains the world’s least industrialized region, with only South Africa categorized as industrialized. Incredibly, Africa’s share of global manufacturing fell from about 3% in 1970 to less than 2% in 2013.

About 60% of the world’s arable land is in Africa. A net food exporter until the 1970s, the continent has become a net importer. Structural adjustment reform conditionalities – requiring trade liberalization – have cut tariff revenue, besides undermining import-substituting manufacturing and food security. 

Sub-Saharan Africa accounts for 24% of the world’s hungry. Africa is the only continent where the number of undernourished people has increased over the past four decades. About 27.4% of Africa’s population was ‘severely food insecure’ in 2016.

In 2020, 281.6 million Africans were undernourished, 82 million more than in 2000! Another 46 million became hungry during the pandemic. Now, Ukraine sanctions on wheat and fertilizer exports most threaten Africa’s food security, in both the short and medium-term.

Structural adjustment

Many of Africa’s recent predicaments stem from structural adjustment programs (SAPs) much of Africa and Latin America have been subjected to from the 1980s. The Washington-based international financial institutions, the African Development Bank and all donors support the SAPs. 

SAP advocates promised foreign direct investment and export growth would follow, ensuring growth and prosperity. Now, many admit neoliberalism was oversold, ensuring the 1980s and 1990s were ‘lost decades’, worsened by denial of its painfully obvious consequences. 

Instead, ‘extraordinarily disadvantageous geography’, ‘high ethnic diversity’, the ‘natural resource curse’, ‘bad governance’, corrupt ‘rent-seeking’ and armed conflicts have been blamed. Meanwhile, however, colonial and neo-colonial abuse, exploitation and resource plunder have been denied.

While World Bank SAPs were officially abandoned in the late 1990s following growing criticism, replacements – such as Poverty Reduction Strategy Papers – have been like “old wine in new bottles”. Although purportedly ‘home-grown’, they typically purvey bespoke versions of SAPs.

With trade liberalization and greater specialization, many African countries are now more dependent on fewer export commodities. With more growth spurts during commodity booms, African economies have become even more vulnerable to external shocks. 

Can the West be trusted?

Earlier, G7 countries reneged on their 2005 Gleneagles pledge – to give $25 billion more yearly to Africa to ‘Make Poverty History’ – within the five years they gave themselves. Since then, developed countries have delivered far less than the $100 billion of climate finance annually they had promised developing nations in 2009.

The Hamburg G20’s 2017 ‘Compact with Africa’ (CwA) promised to combat poverty and climate change effects. In fact, CwA has been used to promote the business interests of donor countries, particularly Germany. 

Primarily managed by the World Bank and the International Monetary Fund, CwA has actually failed to deliver significant foreign investment, instead sowing confusion among participating countries. 

Powerful Organization for Economic Cooperation and Development governments successfully blocked developing countries’ efforts at the 2015 Addis Ababa UN conference on financing for development for inclusive UN-led international tax cooperation and to stem illicit financial outflows.

Africa lost $1.2–1.4 trillion in illicit financial flows between 1980 and 2009 – about four times its external debt in 2013. This greatly surpasses total official development assistance received over the same period. 

Africa must unite

Under Nelson Mandela’s leadership, Africa had led the fight for the ‘public health exception’ to international intellectual property law. Although Africa suffers most from ‘vaccine apartheid’, Western lobbyists blocked developing countries’ temporary waiver request to affordably meet pandemic needs.

African solidarity is vital to withstand pressures from powerful foreign governments and transnational corporations. African nations must also cooperate to build state capabilities to counter the neoliberal ‘good governance’ agenda. 

Africa needs much more policy space and state capabilities, not economic liberalization and privatization. This is necessary to unlock critical development bottlenecks and overcome skill and technical limitations.

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