The world economy needs a policy of non-austerity and an increased allocation of SDRs

The covid-19 pandemic has had a very disruptive impact on poverty reduction. According to a recently published report by the World Bank titled “Poverty and Shared Prosperity 2022: Correcting the course”, the global trend of three decades of reduction in extreme poverty reversed in 2020, the year in which the Covid-19 has been declared a pandemic. In the foreword to the report, the President of the World Bank Group, David Malpass, underlined in this regard that “Covid-19 marked the end of a phase of global progress in reducing poverty. . In the three decades before his arrival, more than a billion people escaped extreme poverty. The incomes of the poorest nations have gained ground.

The practice of vaccine hoarding and the lack of vaccine supply in the Global South have led to even more serious consequences of the pandemic, a longer economic recovery time, on the one hand, and a lack of space budget, especially since little debt relief has already been granted to the countries of the South. indebted countries in particular, meant overall that the amount of stimulus that could be provided to hedge against vulnerability and as a social safety net was far below what was needed, and seriously miniscule compared to the more than 13 trillion dollars that have been provided in rich and advanced countries.

In terms of financial support, the main event in this regard during the pandemic so far has come in the form of an enhanced Special Drawing Rights (SDR) allocation by the International Monetary Fund (IMF), whereby the maximum allocation limit with the IMF at 650 billion dollars was distributed among the member countries. Although an important source of expanding fiscal space and a cushion for national currencies against the US dollar, the majority of the allocation went to rich and advanced countries, since ‘it was made on the basis of “quotas”; not to mention that the allocation itself came about a year and a half after the start of the pandemic in August 2021. While the IMF set up a “Resilience and Sustainability Trust” (RST) window to redirect the allocated SDRs to pass from the rich countries to the developing countries, little money has so far reached the latter.

The global supply shock and the war in Ukraine led to high food and energy prices around the world, which in turn were the main determinant of inflationary pressures, where in many countries the inflation has been at high levels for decades. While a more balanced approach, in terms of demand and supply policies, was needed to fight inflation, more emphasis was placed on the use of restrictive monetary policy in many countries, including many advanced countries. This overly hawkish stance has contributed significantly to both capital flight and high interest payments, while a strong US dollar has also led to greater imported inflation in developing countries like Pakistan.

Inclusive economic growth, in turn, requires greater public investment, and with a broad scope in terms of economic sectors, including the provision of broader social safety nets, which is virtually impossible to see through policy. austerity and an overly hawkish monetary policy that is currently being adopted by many countries

Therefore, while it is important that the restrictive monetary policy be considerably contained, at the same time it was extremely important – and in fact too late – for the IMF to make a further increase in the allocation of SDRs to $650 billion. – and with a more appropriate distribution formula than simply basing it on quotas – in order to provide countries, especially developing countries, with the much-needed cushion in terms of foreign exchange reserves and fiscal space. Moreover, to enable countries to be much better prepared for the consequences of climate change and to play an active role in reducing the carbon footprint, developed countries still need to meet their annual commitments of $100 billion to developing countries.

That said, instead of providing significant debt relief to developing countries or unlocking a much-needed enhanced SDR allocation, so that countries have more fiscal space to make investments Much-needed productive communities, especially those like Pakistan that have suffered greatly from a climate change-related disaster – such as the catastrophic floods in Pakistan that affected an estimated 33 million people – the old mantra of austerity is being advocated.

In fact, according to a report “Ending Austerity: A Global Report on Cuts and Harmful Social Reforms in 2022-25” published in September, many countries are already practicing austerity well and should continue this policy at short term. medium term. The report indicates in this regard “This report warns of the dangers of a post-pandemic austerity shock, much more premature and serious than that which followed the global financial crisis. Instead of harmful austerity measures (or “fiscal consolidation”, governments must urgently identify alternative financing options to support their populations who face multiple and compounding crises – health, energy, financial and climate shocks. to unaffordable living costs The report: (i) presents the impact of budget cuts based on IMF projections in 189 countries through 2025;(ii) examines the latest 267 IMF country reports to identify key austerity measures being considered by finance ministries and the IMF in each country; and (iii) presents alternative financing options, ultimately calling on countries to end austerity by creating fiscal space to finance the recovery and progress of a people towards human rights and the Sustainable Development Goals (SDGs). … Analysis of IMF spending projections shows that the adjustment shock is expected to impact 143 countries in 2023 in terms of GDP or 85% of the world’s population. Most governments started cutting spending in 2021, and the number of countries cutting their budgets is expected to increase through 2025.’

Therefore, the global economy needs a policy of non-austerity and a counter-cyclical policy, to transform economies into more resilient, more productive and less poor and less unequal. This is also important for improving the quality of democracy.

The same report published by the World Bank on poverty also underlined the need for greater economic growth, and with better distributional consequences. The report states in this regard that “despite difficult global and national circumstances, policymakers must redouble their efforts to grow their economies in the years to come, while paying careful attention to who benefits from this growth. The need for growth that boosts the incomes of the poorest could not be greater than it is today.

And inclusive economic growth, in turn, requires greater public investment, and with a broad reach in terms of economic sectors, including the provision of broader social safety nets, which is virtually impossible to see through a austerity policy and an overly hawkish monetary policy. which is currently adopted by many countries.

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