The covid-19 pandemic has had a very disruptive impact on poverty reduction. According to a recently released report by the World Bank titled ‘Poverty and shared prosperity 2022: correcting course’ the overall three-decade trend of reduction in extreme poverty was reversed during 2020– the year that Covid-19 was declared a pandemic. In the foreword of the Report, President of World Bank Group, David Malpass, pointed out in this regard ‘Covid-19 marked the end of a phase of global progress in poverty reduction. During the three decades that preceded its arrival, more than 1 billion people escaped extreme poverty. The incomes of the poorest nations gained ground.’
The practice of vaccine hoarding, and lack of vaccine supply to the global South, led to even more toll taking by the pandemic, longer economic recovery time, on one hand, and lack of fiscal space, especially given little debt relief was provided to already debt-stressed countries in particular, overall meant that the amount of stimulus that could be provided to safeguard against vulnerability and as social safety net was much less compared to what was needed, and seriously miniscule when compared to more than $13 trillion that was provided in the rich, advanced countries.
In terms of financial support, the main occurrence in this regard during the pandemic up till now, happened in the shape of enhanced special drawing rights (SDRs) allocation by the International Monetary Fund (IMF), whereby the maximum allocation limit with the IMF at $650 billion was distributed among member countries. Although an important source of expanding fiscal space and providing cushion to domestic currencies against the US dollar, the majority of the allocation went to rich, advanced countries, since it was made on the basis of ‘quota’; not to mention that the allocation itself came around one-and-a-half years after the start of the pandemic in August 2021. While the IMF put in place a ‘Resilience and Sustainability Trust’ (RST) window to re-channel allocated SDRs to move from rich to developing countries, not many amounts have reached the latter up till now.
The global supply shock, and the war in Ukraine, have resulted in high food and energy prices globally, which in turn have been the main determinant of inflationary pressures, where in many countries inflation has been at decades-high levels. While a more balanced approach, in terms of demand- and supply-side policies were needed to tackle inflation, more emphasis has been on using tight monetary policy in many countries, including many advanced countries. This over-hawkish stance has resulted in significantly contributing to both capital flight and high interest payments, while a strong US dollar has also meant greater imported inflation in developing countries like Pakistan.
Inclusive economic growth, in turn, requires greater public investment, and with a large scope in terms of economic sectors, including providing broader social safety nets, something which is virtually impossible to see through a policy of austerity, and overly hawkish monetary policy stance that is currently being adopted by many countries
Hence, while it is important that tight monetary policy is reined-in meaningfully, at the same time, it has been exceedingly important– and in fact overdue– for the IMF to make a fresh release of enhanced SDR allocation to the tune of $650 billion– and with a more appropriate distribution formula than just basing it on quota– so as to provide countries, especially developing countries, with the much needed cushion in terms of foreign exchange reserves, and fiscal space. In addition, to allow countries to be much more prepared in terms of dealing with the consequences of climate change, and to play an active role in reducing the carbon footprint, developed countries are yet to fulfil their $100 billion annual commitments towards developing countries.
Having said that, instead of providing any meaningful debt relief to developing countries, or releasing a much-needed enhanced SDR allocation, so that countries have greater fiscal space to make much-needed productive investment, especially those like Pakistan that have suffered immensely from a climate change related disaster– like the catastrophic floods in Pakistan that have affected around 33 million people– the old mantra of austerity is being advocated.
In fact, according to a report ‘End austerity: a global report on budget cuts and harmful social reforms in 2022-25’ released in September, many countries are already well into practising austerity, and are likely to continue this policy in the short- to medium-term. The Report indicated in this regard ‘This report alerts of the dangers of a post-pandemic austerity shock, far more premature and severe than the one that followed the global financial crisis. Instead of harmful austerity measures (or “fiscal consolidation”, governments must urgently identify alternative financing options to support their populations that are coping with multiple and compounding crises- from health, energy, finance and climate shocks to unaffordable living costs. The report: (i) presents the incidence of budget cuts based on IMF projections in 189 countries until 2025; (ii) reviews the latest 267 IMF country reports to identify the main austerity measures being considered by Ministries of Finance and the IMF in each country; and (iii) presents alternative financing options, ultimately calling on countries to end austerity by creating fiscal space to finance a people’s recovery and progress toward human rights and the Sustainable Development Goals (SDGs). …Analysis of IMF expenditure projections shows that the adjustment shock is expected to impact 143 countries in 2023 in terms of GDP or 85% of the world population. Most governments started scaling back public spending in 2021, and the number of countries slashing budgets is expected to rise through 2025.’
Hence, the global economy needs a policy of non-austerity, and a counter-cyclical policy, for transforming economies into being more resilient, productive, and having less poverty and inequality. This is also important for improving the quality of democracy.
The same World Bank published report on poverty also pointed towards the need for greater economic growth, and with better distributional consequences. The Report indicated in this regard ‘Despite difficult global and domestic circumstances, policy makers must redouble their efforts to grow their economies in the coming years– while paying careful attention to who benefits from that growth. The need for growth that boosts the incomes of the poorest could not be greater than it is today.’
And inclusive economic growth, in turn, requires greater public investment, and with a large scope in terms of economic sectors, including providing broader social safety nets, something which is virtually impossible to see through a policy of austerity, and overly hawkish monetary policy stance that is currently being adopted by many countries.
