We are witnessing a public bailout of the private sector that dwarfs the bailout response to the 2007–2008 Great Recession. Compared to the $700 billion Troubled Asset Relief Program (TARP) implemented in 2008, today’s mobilization of public funds through the Coronavirus Aid, Relief, and Economic Security (CARES) Act amounts to a whopping $2.3 trillion, thus far.
As we know from media coverage of the CARES Act, today’s relief programs are intended to support payrolls, corporate operations, and small business overhead. What we don’t hear from the mainstream media is news on how these relief programs serve, once again, to privatize profits and socialize losses.
Unfortunately, few people are training their sights on that process — that is, on the actual mechanisms by which public funds are being used to underwrite not payrolls or job creation, but rather new sites of capital accumulation.
For several decades, countries of the periphery have been deeply in the grip of debt. The Covid-19-induced crisis has severely accelerated indebtedness and thus increased financial vulnerability. Recent policy measures by peripheral governments and central banks have brought momentary relief, but ultimately represent a manifestation of the interests of finance capital to get the most out of peripheral economies as long as it is still possible.
Because of the dependence of their currencies on international capital flows, political autonomy in peripheral economies is extremely limited due to the possible effects of political decisions on the movement of such flows. The enormous power of financial markets over monetary policy in the periphery is again becoming evident during the current crisis. The crisis in the global periphery is generally much more severe than in the central countries, not only because of often inadequate health systems that have been abandoned under three decades of neoliberal policy. As peripheral assets do not serve as a store of value, “investors” withdrew almost 100 billion dollars from “emerging markets” within three months, constituting a historically unprecedented capital flight. Factors such as the deflation of prices of primary resources, the fall in external demand for manufactured products, and the fall in cash flows due to decreasing remittances and tourism mean that financial pressure has increased even more. Consequently, peripheral currencies significantly depreciated with the beginning of the crisis, in some cases by as much as 20-30%, as in the cases of Brazil and Mexico.
By May 2020, every African nation had registered cases of COVID-19. By late July, cases had exceeded 844,000. A key factor in Africa’s struggle to mount a response to the pandemic (although not the only one) is that years of debt servicing have eroded states’ capacities to build strong health systems.
Research on crisis and pandemics in different parts of the world, particularly in sub-Saharan Africa (SSA), shows that countries will respond to COVID-19 in two phases – the fiscal expansion phase, which involves a series of stimulus packages, and the fiscal contraction phase, which is characterised by austerity. In the case of COVID-19, these phases will require significant levels of financing. In a region with predominantly low and narrow tax bases, debt and donor aid have become an alternative way for governments to finance state obligations. Currently average African debt-to-GDP is below the 60% (danger) threshold, which is way below the crisis levels of the 1980s and 1990s.
However, the cost of debt has exponentially increased due to low credit ratings translating into poor interest rates. By 2018, 18 SSA countries were at high risk of debt distress and governments made austerity cuts to public services to service their debt obligations. In 2018, 46 low-income countries — most of which are in SSA— were spending more on debt servicing than on healthcare. Annually, SSA countries were spending an average of $70 per capita on healthcare (supplemented with $10 external assistance), in contrast to $442 in China and an average of $3,040 in the EU.Read More »
This piece was written before the Coronavirus outbreak. It is a timely proposal of action. Given the high exposure of the developing world to the virus in contexts of medical and other logistical shortcomings, the damage to their productive capacity is likely to be much more severe than for the advanced world. This fact is already reflected in particularly sharp virus-stirred capital outflows from these countries. All this greatly increases their exposure to the present global structures for sovereign insolvency, and the urgent need for those structures to be radically reformed—as the authors propose with the Pre-Emptive Sovereign Insolvency Regime (PSIR).
In a radical call for reform of the IMF’s pro-creditor and anti-growth approach to indebted countries in Africa, Ndongo Sylla and Peter Doyle argue that the continent has a choice to make. Creditors, using the IMF, must be stopped from forcing devastating output losses by imposing high primary surpluses.
Within a decade, just to keep up with the flow of new entrants into its labour markets, sub-Saharan Africa needs to create 20 million new jobs every year. This is a huge challenge. But it is also a thrilling opportunity—to harness the energy and creativity of all of Africa’s young.
However, after it reviews these issues in Africa, the IMF’s immediate message—literally in the same sentence—is to pivot to ‘budget cuts to secure debt sustainability!’
That is plain wrong. For Africa to meet its development objectives, the IMF must radically change its pro-creditor anti-growth approach to highly indebted/insolvent countries.Read More »
Official calls are mounting. On March 23, African Finance Ministers met virtually to discuss their efforts on the social and economic impacts of COVID-19. Amidst a broad recognition of chronic financing gaps to meet development and climate objectives, they called for a moratorium on all debt interest payments, including the potential for principal payments for fragile states. The United Nations General Secretary addressed the G20 emergency meeting conference call on COVID-19. Along with calls for medical and protective equipment, the need to prioritise debt restructuring was stressed, “including immediate waivers on interest payments for 2020”. The World Bank President addressed the emergency G20 Finance Ministers encouraging bilateral IDA relief without missing the opportunity to plug for structural reforms.
The G20 statement replete with grand aspirations, but no timeframe specified to fulfil them, was vague in respect to debt issues and far short of what is needed: “We will continue to address risks of debt vulnerabilities in low-income countries due to the pandemic.” Hardly commensurate to the alarm bells that have been ringing loudly and repeatedly over the past five years of growing debt difficulties in a number of countries.Read More »
A recent article on the “average impact of microcredit” by Dr. Rachel Meager (LSE) has received much praise over the past few weeks. Meager deploys Bayesian hierarchical modelling to provide a new take on the argument in favour of a reformed system of microcredit. Her work builds on the data provided by six randomized control trials (RCTs) conducted by Abhijit Banerjee and colleagues (see Banerjee, Karlan and Zinman, 2015). Meager makes an attempt to exculpate the microcredit model from the awkward fact that its impact on the poor has been very much less than originally envisaged. She also claims to show that the critics have overstated the negative impact of microcredit. Microcredit should therefore continue to be a policy intervention, she goes on to say, but there need to be changes in the operating methodology for a more meaningful development impact to be possible in the future.
While seemingly a well-meaning attempt to explore the impact of microcredit, we were struck by the way that her overall argument appears to seriously misunderstand, and it definitely misrepresents, the existing research onmicrocredit as a development instrument. Read More »
Over the past decade the expansion of digital-financial inclusion through innovations in financial technology (fin-tech) has been identified by the World Bank, the G20, USAID, the Bill & Melinda Gates Foundation, and other major international institutions, as a key way to promote development and alleviate poverty in the Global South (GPFI, 2016; Häring 2017; World Bank, 2014). Perhaps the most influential and widely reported publication pushing forward this narrative is an article examining M-Pesawritten by US-based economists TavneetSuri and William Jack—and published in the prestigious journal Science—entitled ‘The Long-run Poverty and Gender Impacts of Mobile Money’. M-Pesa isa mobile phone, agent-assisted platform for transferring money from one person to another. It was originally developed with funding from DFID and has quickly become a darling of the digital-financial inclusion movement. In this particular article,the authors make the far-reaching claim that ‘access to the Kenyan mobile money system M-PESA increased per capita consumption levels and lifted 194,000 households, or 2% of Kenyan households, out of poverty’ (Suri and Jack, 2016: 1288).
Suri and Jack’s article in Sciencehas sent ripples through the global development community and has served—as perhaps was intended—to solidify support for upping the promotion of digital-financial inclusion initiatives across the Global South. Importantly, the article’sclaims of unprecedented poverty reduction have been uncritically picked up by all of the international development agencies and microcredit advocacy organisations, as well as by many mainstream economists, so-called ‘social entrepreneurs’, tech investors, and media outlets. Much like microcredit in the 1980s, fin-tech and digital-financial inclusion is now very widely seen as a key—if not the key—to reducing global poverty and promoting local development.
In this post we summarise our recent article entitled ‘Is Fin-tech the New Panacea for Poverty Alleviation and Local Development?’ (Bateman, Duvendack, and Loubere, 2019), which challenges Suri and Jack’s findings, and urges the global development community to take a second, more critical look at their study. We argue that the article contains a worrying number of omissions, errors, inconsistencies, and that it also employs flawed methodologies. Unfortunately, their inevitably flawed conclusions have served to legitimise and strengthen a false narrative of the role that fin-tech can play in poverty alleviation and development, with potentially devastating consequences for the global poor.Read More »
Omar al Bashir has fallen in Khartoum. Beyond regime change–managed by the military– there’s a deeper economic crisis.
In April 11th after five days of sustained protests outside of the compound of the Military High Command in Central Khartoum, the Minister of Defense and First Vice President of Sudan, Ahmed Awad Ibn Auf made a televised broadcast to the nation, announcing the arrest of President Omar El-Bashir and an unspecified number of other high ranking officials primarily associated with Islamist Movement. Ibn Auf declared the military’s intention to form a transitional government, the makeup of which would be announced later, and a three month state of emergency including a curfew. His demands have been rejected by the Sudanese Professional Association and other groups like Girfna, which have declared that only a civilian transitional government would be acceptable. The Sudanese Professional Association have published a Declaration of Freedom and Change which outlines a plan for a four year transitional government made up of civilian technocrats. Chants of tsgut bas (Just fall) changed overnight to sgut (fallen).