In its recently released report ‘Pakistan development update October 2023: restoring fiscal sustainability’ the World Bank (WB), just like the International Monetary Fund (IMF) policy thinking, including as highlighted in its currently negotiated standby arrangement (SBA) with Pakistan, continued to identify neoliberal policy prescription, and within it the fiscal consolidation or austerity policies as the right policy framework both in the short- and medium term. This is indeed quite out of place, given strong backlash against austerity and neoliberal policies, after the Global Financial Crisis (GFC) of 2007-08, and particularly in the wake of the Covid pandemic in terms of their deep negative consequences in the shape of ushering-in deep recessionary, and stagflationary headwinds facing both developed and developing countries, on the one hand, and on the other this perpetuating income and wealth inequality, along with enhancing poverty, on the other. Moreover, austerity policies in particular have not allowed adequate level of public investments that has in turn entrenched elite capture, and reduced the political voice of large segments of demos in pushing for instance greater taxes on the rich.
So, while the Report by WB identified the difficult consequences produced by rising interest rate payments, it did not offer any critique on an otherwise over-board practice of monetary austerity, both in the country and globally, at a time when aggregate supply shock had a significant inflation determinacy and like, for instance, in Spain required more supply-sided, governance related interventions than relying too much on aggregate demand squeeze (or austerity) policies. Unclogging supply side bottlenecks, at the same time, required non-austerity policies both in terms of reined-in monetary and fiscal austerity policies which, on the other hand, have kept cost-push and imported inflationary channels significantly influencing inflation, and produced recessionary– for instance, Pakistan’s economic growth according to both IMF and WB went negative in the last fiscal year – and stagflationary consequences – growth as per WB’s own estimates for the current fiscal year to be at a meager 1.7 percent, while inflation in the last fiscal year averaged a bit under 30 percent. On the other hand, according to the same Report ‘poverty headcount is estimated to have reached 39.4 percent in FY23 – more than 5 percentage points higher than in FY22.’
It needs to be pointed out that both IMF and WB while continue to subscribe to fiscal consolidation (or austerity) policies, as a bread-and-butter neoliberal mantra, they need to understand that such policies practiced by Pakistan – both in and outside of the IMF programme – have in fact neither allowed the country to bring in any meaningful debt sustainability, nor put poverty and income/wealth inequality to be on a decreasing path.
Instead, for instance, as a recently released ‘Trade and development report’ by United Nations Conference on Trade and Development (UNCTAD) titled ‘Growth, debt, and climate: realigning the global financial architecture’ pointed out that Pakistan was among the top 25 developing countries where debt service to revenue ratios increased considerably during the last decade, whereby in 2011 the ratio stood at little less than 10 percent, in 2021 it had more than doubled to be a little over 20 percent. So, the last thing these countries needed was (unwarranted) over-board monetary and fiscal austerity policies, which, on the one hand, increased expenditures with regard to interest payments, and due to imported and cost-push inflation, it also put a damper on growth due to rising cost of doing business, and with it producing negative consequences on unemployment, revenues, and exports; where the latter in the shape of lower exports gave strong impetus to balance of payments deterioration, and greater debt distress in turn burdened foreign exchange reserves, put pressure on currency, and had further negative outcomes for the balance of payments, growth, and inflationary outcomes.
It is therefore of utmost urgency that WB unlike indicating to Pakistan in the report that ‘Short-term macroeconomic stability will depend on the robust implementation of the SBA and continued fiscal restraint and external financing inflows’ not only shifts away from prescribing to austerity policies – which are aggregate demand squeeze policies, while non-development expenditures should continue to be rationalized from greater efficiency – but also calls on the IMF to move away from same policy emphasis. For instance, with regard to the impact of IMF programmes in reducing poverty of programme countries, a June 2022 published research paper ‘The effects of IMF loan conditions on poverty in the developing world’ pointed out: ‘Consistent with much of the literature… we also note that countries under IMF arrangements are more prone to observe an increase in poverty. …The main takeaway is that borrower states need to consider the loan conditions available when they sign an IMF arrangement and should attempt to avoid structural reforms if they hope to reduce poverty.’ The WB, therefore, should reflect greater internalization of such critique of IMF’s neoliberal policy, in its own policy framework which, on the contrary, continues to tow IMF’s neoliberal, and austerity policy emphasis.
Hence, the WB should revisit its neoliberal policy emphasis, given the serious backlash to such policies globally especially over the last decade or so, whereby unlike mainly identifying the role state as a facilitator to private sector, and in turn calling for reducing regulation under upholding the market fundamentalism assumption by indicating in the report, for instance, to ‘…address regulatory constraints to private sector activity, reduce the distortive presence of the state in the economy’ it should learn from disappointments of following such neoliberal minded policies in terms of rising inequality and poverty levels this policy has produced, not to mention the lack of resilience and green economies it has ushered globally. Instead, it should move towards non-neoliberal, counter-cyclical, non-austerity policies.
It needs to be pointed out in this regard that a leading voice on global poverty, Nobel laureate in economics, Angus Deaton was quoted from his just published book in a recent Bloomberg published article ‘A Nobel laureate offers a biting critique of economics’ as ‘So, when the Princeton University emeritus professor has a new book out with the sober title Economics in America you might anticipate a valedictory celebration of the wonders of the discipline. It’s anything but. What Deaton calls his mea culpa is a broadside on his profession and some of its most celebrated figures. Economists and their relentless focus on markets and efficiency, as well as their dogmatic attachment to theories (even after they’ve been disproven), have had life-or-death consequences for millions, he argues. …Deaton believes [Larry] Summers and a small cadre of influential economists helped lay the foundation for the Asian financial crisis of the late 1990s and also the 2008 global financial crisis by recklessly helping to ease restrictions on the flow of speculative capital around the world. …Deaton’s primary complaint isn’t with Summers. It’s that the profession has become intoxicated with markets and money, losing sight of its primary mission as set out in its earliest days by Adam Smith, John Locke and others who came to economics via philosophy and other fields, rather than commerce. “The discipline has become unmoored from its proper basis, which is the study of human welfare,” Deaton writes in his book.’
Given the existential challenges already unfolding, and debt sustainability coming drastically under stress in a number of developing countries during the last decade, and especially since the Covid pandemic, it is about time the Bretton Woods institutions should see a greater role of public investment, and non-neoliberal policies, including greater multilateral support, for instance in the shape of higher enhanced allocation of special drawing rights (SDRs) to developing countries, especially the highly climate vulnerable ones like Pakistan. With regard to the importance of global public investment (GPI), a recently released report ‘Time for global public investment’ by Global Public Investment Network highlighted comments in this regard by leading thinkers globally. In the Report for instance, Jayati Ghosh and Jonathan Glennie pointed out in their article ‘International public finance cannot be replaced by private money’: ‘A very large part of the investment required to meet the SDGs falls into one of these two categories. This means that governments have to spend to ensure such investment, either directly or through directing market-based investments through incentives or regulation. In many cases, it is more impactful and more cost-effective for governments to undertake this directly through public investment.’
Moreover, in her article in the same Report, Mariana Mazuccato indicated about GPI as ‘These principles are relevant at the international level as well and are well represented in the growing call for Global Public Investment – a form of cooperative international investment that is co-created, accountable, ambitious and focused on the common good. GPI puts the global common good at the heart of international public finance and foregrounds the role of public money as a valuable tool for shaping development outcomes, rather than filling the gap in the absence of other monies.’
In this regard, WB should come true on its reported ‘debt pause clause’ policy for highly climate change challenged countries on one hand, and on the other, should work towards better implementation of the ‘Bridgetown Initiative’ towards unlocking greater multilateral support to developing countries, rather than pushing them towards greater practice of otherwise uncalled for austerity policies. Such a revisit to the policy of both Bretton Woods institutions – the IMF and WB – given the need for greater investments needed to reach much greater resilient, green, and inclusive economies, especially in view of the fast-unfolding climate change crisis, and also the likelihood of the related ‘Pandemicene’ phenomenon.
Another area of focus for the WB – including its group member that provides private lending, International Finance Corporation (IFC) – is to improve its transparency with regard to provision of funding/lending that helps phase down the fossil fuel industry. A September 12, 2023 Guardian published article ‘World Bank spent billions of dollars backing fossil fuels in 2022, study finds’ pointed out: ‘The World Bank poured billions of dollars into fossil fuels around the world last year despite repeated promises to refocus on shifting to a low-carbon economy, research has suggested. The money went through a special form of funding known as trade finance, which is used to facilitate global transactions. Urgewald, a campaign group that tracks global fossil fuel finance, found that the World Bank supplied about $3.7bn… in trade finance in 2022 that was likely to have ended up funding oil and gas developments. Heike Mainhardt, the author of the research, called for reform of the World Bank and its private finance arm, the International Finance Corporation (IFC), to make such transactions more transparent and to exclude funding for fossil fuels from its lending. “They can’t say that they are aligned with the Paris agreement, because there isn’t enough transparency to be able to tell,” she said.’
Main area of concern highlighted in the research cited in the article above, and titled ‘Is the World Bank giving billions of trade finance to fossil fuels?’ is providing better transparency with regard to WB’s trade financing window. The Report points out in this regard: ‘Despite trade finance’s vast and still-growing share of the IFC’s budget, over 70% of it is given out in secrecy. …The types of goods and businesses it is funding are not even reported to the World Bank’s shareholders, i.e., our governments. The public has a right to know where all this money is going. Of the many concerns surrounding this lack of transparency is the fact that IFC’s trade finance can be used for oil, gas or coal and their related goods. This is because the World Bank Group’s pledges to end finance for coal and upstream oil and gas only apply to direct finance and not to trade finance, which is considered indirect finance. IFC’s coverage of trade transactions is only restricted by IFC’s Exclusion List…, where we find items such as radioactive materials, but not any oil-, gas-, or coal-related goods.’
Having said that, it is not just the trade finance that needs more transparency, as Oxfam in an October 2022 published report ‘Unaccountable accounting: The World Bank’s unreliable climate finance reporting’ called for greater transparency of overall climate finance provided by World Bank. It pointed out in this regard: ‘We found that the Bank’s current climate finance reporting processes are such that the Bank’s claimed levels of climate finance cannot be independently verified. Oxfam’s audit found that the Bank’s claims could be off by as much as $7bn, or 40%, based on publicly available information. The only way to have confidence in the Bank’s climate finance accounting is through public disclosure of documentation that shows how climate finance assessments are made for these projects. Having this information will allow stakeholders to hold the Bank and recipient governments accountable – something made more important given that so much of what is currently claimed as climate finance is provided through debt instruments that will require repayment, which can strain limited public resources needed to fund public services. This increased transparency will also help safeguard against the possibility that climate finance claimed is simply greenwashing. Otherwise, there is a real risk of over-reporting and/or under-investing in mitigation and adaptation, which could lead to dire consequences.’Dr Omer Javed, "World Bank needs to revisit its policy and lending focus," Business recorder. 2023-10-06.
Keywords: Economics , Monetary fund , Policy thinking , Neoliberal policy , Public investments , Climate finance , Interest payments , World Bank , UNCTAD