Funeral of Austerity

The global economy and its worst contraction in eight decades overshadowed the World Bank and International Monetary Fund (IMF) annual meetings last week. The rhetoric at these meetings was a significant shift from the last few decades of neoliberal policies.

The IMF Managing Director Kristalina Georgieva titled her plenary speech ‘A New Bretton Woods Moment’, referring to the place where the World Bank and IMF – commonly called the Bretton Woodsinstitutions – were created at the end of the Second World War. Her speech began and ended by referring to John Maynard Keynes; the brains behind the Bretton Woods conference and the post-World War II economic order, and whose thinking had fallen out of favour with the rise of neoliberalism in the 1970s.

These are tremendously challenging times for the global economy with the unprecedented fall in production, rising unemployment and horrendous increase in poverty. However, this is also an interesting moment in terms of the ideas that may shape the economic world going forward; what were considered heretical ideas, as those of Keynes just a year back, are now brought to the fore by even the IMF. 

As I have been arguing in this column, the current conjuncture with the devastating economic depression may well bring an end to the neoliberal era. And as for the de-legitimization of mainstream economic thinking, the words of Italian Marxist, Antonio Gramsci are poignant: “The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.” These are times of ideological upheaval, and the search for alternatives is of utmost importance, but first we must understand how the old is dying.

Global outlook

The IMF’s flagship report the World Economic Outlook launched last week claims the global economy will worryingly contract by 4.4% in 2020, and then recover to 2019 levels of global production by the end of 2021. Furthermore, as characteristic of the economic establishment, the IMF speaks with two hands, as economists often say “on the one hand” and then “on the other hand” hedging their bets. In this way, the IMF report goes onto mention further dangers:

“The uncertainty surrounding the baseline projection is unusually large. The forecast rests on public health and economic factors that are inherently difficult to predict. A first layer relates to the path of the pandemic, the needed public health response, and the associated domestic activity disruptions, most notably for contact-intensive sectors. Another source of uncertainty is the extent of global spill overs from soft demand, weaker tourism, and lower remittances. A third set of factors comprises financial market sentiment and its implications for global capital flows. Moreover, there is uncertainty surrounding the damage to supply potential - which will depend on the persistence of the pandemic shock, the size and effectiveness of the policy response, and the extent of sectoral resource mismatches.”

Such risks propelling further devastation of the global economy are also appropriate for Sri Lanka. Not only are we now caught in the second wave of the pandemic with increased restrictions starting to be placed on the economy, the Sri Lankan economy is pummelled by weaker demand for its exports, prolonged shutdown of its tourism sector and fall in remittances, which sustained foreign earnings in the past. Some of the recommendations to address the global economic downturn, which are historically uncharacteristic of the IMF, are also relevant for 
Sri Lanka:

“Although adopting new revenue measures during the crisis will be difficult, governments may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis (including increasing tax rates on higher income brackets, high-end property, capital gains, and wealth) as well as changes to corporate taxation that ensure firms pay taxes commensurate with profitability.” 
Indeed, for Sri Lanka trapped by falling government revenues, increasing taxes from the broader public during a downturn is not a possibility. In this context, the Sri Lankan economic establishment seems to be even far right of the IMF in not considering higher property and wealth taxes. Such new taxes that can redistribute wealth towards much needed state investment to stimulate the economy is the priority.

Double standards

The IMF Managing Director in her plenary speech, claims that the public debt of most countries are going to rise as a percentage of their GDP with an average of 125% for advanced economies, 65% for emerging markets and 50% for low income countries. She then went on to call for such increased debt-led stimulus of the economy to be prudent in ensuring public investment leads to good returns, taking advantage of the lower interest rates in the advanced economies. She also emphasised investment in green energy as the world faces climate change related problems. 

While this rhetoric sounds good for the moment, we also know that the global order and the IMF in practice is prone to double standards when it comes to the Third World. Even if the IMF decides to look lightly upon the burgeoning public debt of Sri Lanka, which is likely to reach 100% of GDP in the months ahead, the cost of financing such debt is much higher for Sri Lanka.
Sri Lanka’s pubic debt in 2019 as a percentage of GDP is 44.1% in domestic debt and 42.6% in foreign debt. And the interest rates charged on Sri Lanka’s foreign debt are 7% to 8% higher than the near zero interest rates for the advanced economies. In other words, even if it is the end of the neoliberal order, it is not the end of the unequal global order; where global capital thrives on exploiting the Third World.

For Sri Lanka, the immediate need is to manage a safe landing amidst this crisis by borrowing in the short-term from any international actor who lends at lower interest rates, and avoid a balance of payment led bankruptcy. Going with a begging bowl is the price to pay for the neoliberal policies of successive governments; including trade liberalisation leading to a high import bill and urban/infrastructure development with little returns.

In this context, the sustainable and prudent financial strategy for Sri Lanka over the medium term would be one of keeping domestic interest rates low, public financing through domestic debt and increasing the government coffers through re-distributive wealth taxes. However, as Keynes famously said, during an economic depression believing that reducing interest rates would increase economic activity is like “pushing on a string.” Capitalists will not invest when the economy is shrinking and returns are low if not negative, as their only motive is profit. Therefore, the government needs to borrow cheaply, and increase investment to stimulate the economy towards creating employment and increasing income streams.

Great shift

The broader point is that lower interest rates across the board will ensure that the wealthy do not earn by merely sitting on their wealth. The future direction of the global economy also depends on what happens to global finance capital, also known as fictitious capital. What will become of the financial markets that have been ballooning into never-never-land? Without possibilities of investment for this excess surplus capital, particularly with the global economy in contraction, the bubble will inevitably burst.   

These are great times of change, both materially and ideologically. Reflecting on the World Bank and IMF annual meetings, the London-based Financial Times, considered the voice of global capital, in an article on 16 October 2020 titled, ‘Global economy: The week that austerity was officially buried’ had the following to say: 
“This was the week we witnessed the funeral of austerity. Those who used to worship at its altar now urge countries to throw caution to the wind. Fiscal orthodoxy, practised over decades since the debt crises and inflation of the 1970s and 1980s, has been replaced with fiscal activism.”

Indeed, the old are dying, even though the Sri Lankan economic establishment are refusing to attend their funeral. Neoliberalism got a second wind after the Global Economic Crisis of 2008 with the movement for austerity that sought cuts to the remains of social welfare. Now austerity, one strong pillar of the neoliberal class project, is being buried by the IMF, the chief guardian of neoliberalism. 
In the weeks ahead, as Sri Lanka unveils perhaps the most significant Budget in recent decades, a budget that is likely to break or float the economy, I will be writing about the implications of the global shift for the Sri Lankan economy and the new alternatives we must seek. For now, during these hard times, we can find some solace in the funeral of austerity.