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Economic recovery, inequality, corruption, and wealth tax

January 2022 update of the IMF’s (International Monetary Fund’s) flagship report ‘Global Economic Outlook’ (GEO) revised global economic growth forecast for the current year downwards. As per GEO’s October 2021, report growth forecast for 2022 stood at 4.9 per cent, while the current GEO report revised it down by 0.5 per cent to 4.4 per cent. Highlighting the main reasons for this, the latest report pointed out as follows: ‘The global economy enters 2022 in a weaker position than previously expected. As the new Omicron Covid-19 variant spreads, countries have re-imposed mobility restrictions. Rising energy prices and supply disruptions have resulted in higher and more broad-based inflation than anticipated, notably in the United States and many emerging market and developing economies. The ongoing retrenchment of China’s real estate sector and slower-than-expected recovery of private consumption also have limited growth prospects.’

Global downgrade, overall, was mainly due to weak economic performance of the US and China, while many other major economies like Brazil, Mexico, Russia, South Africa, Canada, Germany, France, Italy, Britain, and Spain, also contributed significantly to this growth downgrades; while, among major economies, India saw a positive revision in its already high growth forecast for 2022, from the October report by 0.5 percent to 9 percent in the January update.

As per the January GEO report, inflation and its expectations on the higher side are likely to be more of a near term concern, whereby it pointed out: ‘Inflation is expected to remain elevated in the near term, averaging 3.9 percent in advanced economies and 5.9 percent in emerging market and developing economies in 2022, before subsiding in 2023. Assuming medium-term inflation expectations remain well anchored and the pandemic eases its grip, higher inflation should fade as supply chain disruptions ease, monetary policy tightens, and demand rebalances away from goods-intensive consumption towards services. The rapid increase in fuel prices is also expected to moderate during 2022–23, which will help contain headline inflation.’

Therefore, the monetary policy response also needs to be accordingly (not monetary tightening) keeping in view the fact that a significant basis of this inflation is being driven by supply-side commodity shock. While in certain advanced countries, particularly the US where a large pandemic-related stimulus is feeding into inflation significantly as well, along with supply-side causation, although greater monetary tightening is more warranted, yet that too needs to be balanced given the negative consequences such tightening is likely to have in terms of rising borrowing costs and higher debt repayments for developing countries like Pakistan.

In this regard, the January update highlighted as follows: ‘Less accommodative monetary policy in the United States is expected to prompt tighter global financial conditions, putting pressure on emerging market and developing economy currencies. Higher interest rates will also make borrowing more expensive worldwide, straining public finances. For countries with high foreign currency debt, the combination of tighter financial conditions, exchange rate depreciations, and higher imported inflation will lead to challenging monetary and fiscal policy trade-offs. Although fiscal consolidation is anticipated in many emerging market and developing economies in 2022, high post-pandemic debt burdens will be an ongoing challenge for years to come.’

Yet, even after the downgrade in economic outlook, overall global economic recovery continues but such a recovery remains both divergent— in terms of rich, advanced countries showing much faster recovery than developing countries, mainly at the back of higher inoculation rates, and greater stimulus injections – and also much less equal over the pandemic in terms of the level of inequality, and in turn inclusivity. It is, therefore, important to note that the IMF report does not bring out concern with regard to rising inequality, and inclusive growth, which otherwise is a big problem, as pointed out for instance in a recent ‘Democracy Now’ published article ‘Global wealth inequality is fueling the pandemic and killing millions’ in the following words: ‘The Covid-19 pandemic has amplified inequality on a global scale. Most wealthy nations have vaccinated more than 70% of their populations, while in many poor countries, especially in Africa, the vaccination rates are still below 10%. …Vaccine profits have minted at least nine new billionaires at Moderna, BioNTech and China’s CanSino, amassing combined new wealth of over $19 billion, according to the Peoples Vaccine Alliance.’

According to a recently released report by Oxfam titled ‘Inequality kills: the unparalleled action needed to combat unprecedented inequality in the wake of Covid-19’ inequality has increased significantly during the pandemic, indicating in turn that both direct stimulus and rules of economic policy have overall remained as such to allow the already rich to engage better in creating and attaining from economic recovery; while real wages have not seen much increase for middle- and low-income groups in particular during the pandemic. The report also points out that rising inequality has also meant diminishing capacity of individuals to deal with the pandemic as against those who belong to the richer segments of societies within countries, and due to the widening gap between rich and poor countries.

The report points out in this regard as follows: ‘The wealth of the world’s 10 richest men has doubled since the pandemic began. The incomes of 99% of humanity are worse off because of COVID-19. Widening economic, gender, and racial inequalities—as well as the inequality that exists between countries—are tearing our world apart. This is not by chance, but choice: “economic violence” is perpetrated when structural policy choices are made for the richest and most powerful people. This causes direct harm to us all, and to the poorest people, women and girls, and racialized groups most. Inequality contributes to the death of at least one person every four seconds.’

Rising level of inequality could also lead to greater political instability. It may also create hurdles in combating corruption, especially in developing countries where the low level of inclusive growth to start with would most likely only be enhanced during the pandemic, mainly at the back of lower stimulus injections and much sharper inflation rise due to higher proportion of imported inflation in overall inflation, which is important in view of the global nature of supply shock. As per an Economist published article ‘Corruption is getting worse in many poor countries’ with regard to the recently released report by Transparency International: ‘Most of the world scores poorly in Transparency International’s annual corruption index. …In the latest ranking, released on January 25th, almost 70% of countries score below 50 [with score of 100 reflecting ‘very clean’]. Poor countries tend to do worse than rich ones, partly because poverty makes corruption worse and partly because corruption makes poverty worse.’

Moreover, as per the article, corruption in poor countries also has a causal determinant in the shape of malpractices by foreign companies, based in rich countries, and operating in developing countries, whereby ‘Poor countries, especially those in Africa, the Middle East and Asia, are singled out for the bad behaviour of their governments. Yet companies based in rich countries often facilitate corruption abroad. Transparency International publishes a separate report on countries whose companies bribe foreign officials – and the top scorers on that list are the same ones lauded as least corrupt by the organisation’s main index.’

Yet, while the IMF report does not point towards imposing a wealth tax on rich, which is indeed one of the main ways to tackle rising inequality. In turn, it can increase the share of economic recovery more broadly. In this regard, the article from ‘Democracy Now’ pointed out as follows: ‘“It is time to levy a wealth tax on the world’s multi-millionaires and billionaires,” Chuck Collins of the Institute for Policy Studies and the Fight Inequality Alliance, wrote, introducing their “Taxing Extreme Wealth” report. “This is not to simply raise revenue to vaccinate the world and invest in robust public health systems. But a wealth tax that is intended to save democracy from the extreme concentrations of wealth and power.” A graduated wealth tax on people with $5 million or more would raise $2.5 trillion annually, the report calculates. Those funds could pay to contain this pandemic, invest in public health to prevent the next one, and lift millions out of poverty. Tax the rich.’ Having said that, in addition to enhancing the efficiency of taxation policy in countries, and globally, economic policy needs to strengthen inclusive economic institutional design from its current predominant extractive and neoliberal nature to overall reduce inequality and political instability, and perpetuate inclusive, sustainable growth’s global foundations.

(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)

Dr Omer Javed, "Economic recovery, inequality, corruption, and wealth tax," Business Recorder. 2022-01-28.
Keywords: Economics , Economic growth , Economic zones , Economic activity , Economic conditions , Sales tax , Stat Bank , Fedral Budget , Economic policy , IMF , GDP , CPI , SBP

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