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Existential threats, elections, and economic policy

‘As we enter 2024, results of the Forum’s Global Risks Perception Survey 2023-2024 (GRPS) highlight a predominantly negative outlook for the world over the short term that is expected to worsen over the long term… Surveyed in September 2023, the majority of respondents (54%) anticipate some instability and a moderate risk of global catastrophes, while another 27% expect greater turbulence and 3% expect global catastrophic risks to materialize in the short term. Only 16% expect a stable or calm outlook in the next two years. The outlook is markedly more negative over the 10-year timeframe, with 63% of respondents expecting a stormy or turbulent outlook and less than 10% expecting a calm or stable situation.’ – An excerpt from the recent World Economic Forum (WEF) published ‘The Global Risks Report 2024’

While no elections are unimportant for any country, the upcoming general election next month is coming in a decade that will define the extent of damage that the existential threat of climate change could hold for not just humanity at large, but all the more for a highly climate change vulnerable countries like Pakistan. That climate change also contributes to the ‘Pandemicene’ phenomenon is a fact. The country will also need to invest heavily into improving public health sector resilience, including enhancing capacity to manufacture vaccines; a lesson that the bitter experience of ‘vaccine nationalism/apartheid’ taught to the global South in particular.

While the country is a very small fish when it comes to the extent of impact in the ocean of carbon footprint in terms of the burning of fossil fuels primarily, yet notwithstanding the steps that major contributors – mainly the rich, advanced countries – take, the country will nonetheless need to do its best to move towards a much greener, a lot more resilient economy to avoid the catastrophic consequences that crossing this threshold is likely to bring, for instance, in terms of far more intense, and frequent natural disasters. Already, the country is suffering the consequences of the floods in 2022 that inundated one-third of the country, causing a lot of loss to life, while livelihood and infrastructure damages went in tens of billions of dollars. Moreover, smog in many parts of the country – with Lahore topping charts as the most polluted city on many days during this winter, among more than 130 countries where such measurements are recorded – is already taking a heavy toll on health, education, and economy, among other likely psychological consequences.

The most important target of global warming of not crossing the ceiling of 1.5C average annual temperatures is already in serious danger of breaking as a recent Guardian article ‘2023 smashes record for world’s hottest year by huge margin’ pointed out: ‘The planet was 1.48C hotter in 2023 compared with the period before the mass burning of fossil fuels ignited the climate crisis. The figure is very close to the 1.5C temperature target set by countries in Paris in 2015, although the global temperature would need to be consistently above 1.5C for the target to be considered broken. Scientists at the EU’s Copernicus Climate Change Service (CCCS) said it was likely the 1.5C mark will be passed for the first time in the next 12 months.’

The government that comes into office next month, will then not only be facing the challenge of surpassing the mountain of climate change crisis in terms of transitioning the economy accordingly, but will also be facing two main hurdles – the extent of which the country has likely not faced before – to make the needed investments. They are stagflation, and an acute debt crisis. Reversing low economic growth situation will need greater investments, but with seriously large gross financing needs – which are forecasted to remain over most of the tenure of the next government’s time in office – and high cost of borrowing, and low level of multilateral support, primarily in terms of climate finance – for instance, contributions to ‘loss and damage fund’ – and International Monetary Fund’s (IMF’s) allocation of special drawing rights (SDRs), not to mention the practice of over-board austerity policies makes it highly likely that the country will break into moving towards a high growth trajectory on any consistent basis.

A recent Project Syndicate (PS) published article ‘The conceptual roots of the Global South’s debt crisis’ pointed out a seriously lackluster multilateral support in enabling debt distressed countries to effectively deal with debt crisis, by pointing out: ‘Given that these [rich] countries cannot run out of their own currency, there are no financial constraints on canceling in whole or in part the public and publicly guaranteed external debt stock of 131 lower- and middle-income countries (excluding China, Russia, and India). This debt stood at $2.6 trillion in 2022 – an amount less than Germany’s public debt.’

Compared to what rich countries provided, for instance, during the pandemic in terms of trillions of dollars of stimulus, this is peanuts. Plus, given the debt issue of a number of developing countries is composed on the currencies of these countries – perhaps the US dollar perhaps – provision of this should not be a problem for individual countries and then channelling it to countries on needs basis through the channel of IMF’s SDR allocation. The same article pointed out in this regard: ‘The main difference is that Japan, the US, Canada, and the UK are monetarily sovereign: their public debt is denominated in their national currency, while their central banks maintain some control over the interest rates applied to that debt. Most governments in the Global South are at risk of insolvency because they borrowed in foreign currencies. MMT [Modern Monetary Theory] implies that if rich countries desired to provide significant debt relief to the Global South, the main challenges would be coordination – between different creditors and debtors, as well as other relevant actors – and accountability, not affordability.’

Hence, on one hand, rich countries with a lot of say in the policy boards of multilateral institutions like IMF do not allow for provision of enhanced SDR allocation that would exceedingly allow relieving these developing countries off their burden of debt – a meaningful part of which owes to lack of economic growth at the back of years of, and otherwise uncalled for fiscal consolidation policy emphasis by these same multilateral institutions, and on account of lack of climate compensation that otherwise meant the government obtaining loans to deal with the consequences of climate disasters, and even Covid pandemic, which had a strong link with climate change crisis – and, on the other, would allow adopting non-austerity, counter-cyclical policies to overall boost economic growth.

The January 2024 edition of World Bank’s flagship ‘Global Economic Prospects’ (GEP) report pointed out a low growth scenario for the country, whereby for fiscal year 2023/24, it forecasted economic growth rate at a meager 1.7 percent, which is expected to only slightly increase to 2.4 percent for 2024/25. As already highlighted by IMF’s World Economic Outlook (WEO) report for 2023, growth is very important for dealing both with debt distress, while economic growth also requires counter-cyclical policy to produce positive signals for aggregate demand, and aggregate supply.

Moreover, in addition to lack of investments leading to suppressing economic growth, a low level of productive capacity is the other major contributor, which would require for the next government to provide non-neoliberal institutional, organizational, and market reforms to enhance the productive capacity. As this improves there will be less pressure on having foreign currency, for instance the US dollar, to pay for imports since they will be produced all the more within the country, requiring in turn local currency, supply of which in turn is not limited, while the inflationary impacts of money printing will be curtailed once enhanced in productive capacity creates a healthy balance between aggregate demand, and aggregate supply, so that there is little scope for the situation of ‘too much money chasing too few goods’.

The economic manifestos that are coming through from major political parties, for instance, are quite oblivious to this great economic policy challenge, not to mention a lack of debate and awareness provided by media with regard to the daunting policy task at hand for the incoming government after the elections.

Dr Omer Javed, "Existential threats, elections, and economic policy," Business recorder. 2024-01-12.
Keywords: Economics , Economic policy , World economic , Foreign currency , General election , Climate change , Economic growth , Pakistan , Interest rates , 2022

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