Jayati Ghosh Says More…
Project Syndicate: Rather than rely on the “blunt tool of interest-rate hikes,” you argued last November, policymakers should have responded to the latest bout of inflation with “sensible policies such as mending broken supply chains, capping prices and profits in important sectors like food and fuel, and reining in commodity-market speculation.” Nearly a year later, rate hikes seem to have reined in inflation at relatively low cost to advanced economies. Is the bill for these countries yet to come due? What steps can developing economies – which have paid the price – take now to achieve “greater fiscal autonomy and monetary-policy freedom”?
Jayati Ghosh: It is misleading to say that rate hikes have reined in inflation. Correlation does not imply causation. And, in fact, while inflation in the advanced economies has subsided, this is largely because the forces that fueled the latest bout of inflation – spikes in global food and fuel prices, as well as supply-chain disruptions – have subsided. In global commodity markets, prices peaked in mid-2022, but have since fallen, as speculative futures trading waned.
Interest-rate hikes are designed to deal not with cost pressures, like those that fueled the recent bout of inflation, but with “excess demand,” by making both consumption and investment more expensive. As a result, such hikes ultimately dampen economic activity and employment. These effects were less pronounced in the advanced economies this time around, owing to the legacy and persistence of powerful fiscal stimulus.
Low- and middle-income countries have not been so lucky. Advanced-economy interest-rate hikes have had precisely the effects I predicted in the commentary you cite: by reversing the flow of capital from the developing world to developed economies, they have led to “debt crises and defaults, significant output losses, higher unemployment, and sharp increases in inequality and poverty.” In many countries, “economic stagnation and instability” followed.
The resulting currency devaluations have caused the price levels of essential goods to remain high, with food- and fuel-importing countries – including in the developed world – facing the biggest cost pressures. So, advanced-economy rate hikes have caused far-reaching damage, especially in the developing world, though developed countries, too, stand to lose. And the rate hikes may not have even been necessary, because inflation was always going to decline as cost pressures subsided.
PS: Lamenting the global food system’s dysfunction, you pointed out in June that the rise in fertilizer prices since 2021 was the result of “greedflation”: corporations leveraged supply shocks to “increase their profit margins dramatically.” Similarly, the Black Sea Grain Initiative (BSGI) primarily served the “interests of the agribusiness giants trading in Ukrainian grain and the financiers backing them.” How can the power of agribusiness be appropriately limited, and who should take the lead in this effort?
JG: There is no doubt that major agribusiness firms have enjoyed larger profit margins and dramatically higher revenues. But the term “greedflation” should be kept in quotation marks, because this is not an issue of individual corporations behaving greedily. Rather, it reflects the workings of a global food system that has become increasingly concentrated and oriented toward the interests of profit-making intermediaries, not the interests of the actual producers and consumers of food.
The food system has become dysfunctional in other ways, too. It is excessively reliant on chemicals, produces large amounts of greenhouse-gas emissions, and contributes to environmental degradation. Moreover, hunger has persisted, and even increased, alongside excess consumption and wastage. Food is even being used as a geopolitical weapon – most blatantly, in the denial of food to the besieged residents of Gaza.
A range of policies, at the national, regional, and international levels, can reduce the ability of private commercial interests, particularly large corporations, to control the global food system. For starters, governments should build up public buffer stocks and strategic grain reserves, in order to contain price volatility and ensure uninterrupted access to staple foods, especially for more vulnerable segments of society. In addition, smallholders should be given the support and encouragement they need to adopt ecologically sustainable agricultural techniques. And financial activity in commodity futures markets needs to be much more strictly curbed.
PS: The countries that have recently faced the “largest increases in food insecurity,” you note, “are also those engulfed in debt crises and experiencing the severest effects of climate change.” But G20 leaders and institutions like the International Monetary Fund have failed adequately to support debt reduction and climate mitigation and adaptation in these countries. In an ideal world, how would the G20 and IMF embrace, reverse, or redesign to break the “vicious cycle of debt and climate,” and what are they already doing right?
JG: The failure of global “leaders” to tackle these challenges is both depressing and terrifying, because every day that goes by without a solution, the problems deepen – and become more difficult to solve. Those with the power to make a difference appear to be wedded to expensive and increasingly performative summitry, which brings little real-world progress. The G20 and the IMF acknowledge the obvious problems, but do next to nothing – or too little, too late – to address them.
One action that can and should be taken immediately is another issuance of special drawing rights – the IMF’s reserve asset – which would provide foreign-exchange liquidity to countries in need. The United Nations’ High-Level Advisory Board on Effective Multilateralism, of which I am a member, advocates regular annual allocations of SDRs, in service of SDRs’ original goal: to serve as a key component of global reserves.
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We also recommend that the IMF’s Articles of Agreement be reviewed to allow for “selective SDR allocation,” so that SDRs go to countries with weak external positions, rather than being distributed according to the size of countries’ IMF quotas, which guarantees that countries that need them least get the most. The Articles should also establish that SDRs should be issued in response to specific, predetermined developments, such as climate-related or terms-of-trade shocks. This would accelerate the global response to such crises.
A second urgent imperative is to reform the global tax system to make it more just and efficient. The current system – developed a century ago, when multinational corporations were less common and wealthy individuals could not shift their assets around easily – leaves far too much space for tax avoidance and evasion, which is particularly damaging for low- and middle-income countries.
The specific reforms are well-known. First, we must implement unitary taxation of multinationals, meaning that each country taxes its share of a multinational’s profits, based on sales and employment, at the same rate as local firms. Second, we need a global minimum corporate-tax rate that is high enough to make a difference. Third, we must ensure that countries are maintaining and sharing their national asset registers, so that extreme wealth is taxed appropriately.
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The OECD’s Inclusive Framework on Base Erosion and Profit Shifting got these principles right. But the outcome of the process reflected so much compromise – including carveouts and reductions in coverage – that it will not get us anywhere near where we need to be. In any case, only the 15% minimum corporate-tax rate – which is too low and well below the median global corporate tax rate – has been accepted by major countries. As tax negotiations shift to the UN, we must work rapidly to close loopholes and ensure that all countries benefit from the increased fiscal space that would result from a more effective system of taxation.
A third urgent priority is addressing the sovereign-debt crisis. The first step is to establish a “coordination platform” involving all creditors, in order to facilitate rapid, systematic, and reliable cooperation on debt treatment on terms that preserve the economic and social rights of citizens in debtor countries. With strong political will, this could be done rapidly. After all, governments have shown that they are capable of responding quickly to debt crises in “systemically important” institutions, from Silicon Valley Bank in the US to Credit Suisse in Switzerland. The same sense of urgency and willingness to do whatever it takes is essential to tackle the sovereign-debt crisis that is now affecting much of the world – including hundreds of millions, if not billions, of people.
By the Way…
PS: The 2022 report Earth for All, produced by the Club of Rome’s Transformational Economics Commission (of which you are a member), establishes empowerment of women as one of five “extraordinary turnarounds” that the world badly needs. How should empowerment be measured, and what are the most powerful levers for achieving it?
JG: To measure women’s empowerment, some standard indicators – such as those relating to nutrition, health, education, incomes, and asset ownership – are useful. Data showing time dedicated to unpaid labor further enrich the picture. All such data must be compared to the same indicators for men. Data providing insight into the extent of women’s agency and voice also help; rates of political representation are a good example.
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Public-policy approaches to boosting women’s empowerment tend to focus on improving nutrition, ensuring universal access to quality health care and education, and delivering universal pensions. But such priorities, while important, are not enough.
Consider care work, which continues to be performed primarily by women. The only way to prevent this from impeding women’s social and economic empowerment is to recognize, reduce, and redistribute such work, while ensuring that care workers are rewarded for their efforts. Political representation for care workers would also help.
To achieve equality in the workplace, interventions should include improving the quality of public employment and implementing regulations that reduce or eliminate discrimination. While the dismantling of socio-cultural barriers to women’s empowerment will take a long time, legal and institutional barriers can be lowered quickly.
PS: “Income redistribution,” Earth for All concludes, “is not negotiable.” You have long advocated a tax on extreme wealth, in India and beyond. How should developing-country policymakers design such a tax to prevent evasion and maximize revenues? What complementary policies might be needed to ensure fair and effective implementation?
JG: Both income and asset inequality have now reached such high levels – globally and in many countries – that it can be described only as dystopian. This is not unavoidable; it is a political choice.
Addressing inequality requires a two-pronged approach. The first is “pre-distribution” – ensuring that policies, institutions, and regulatory systems do not allow the generation of sky-high incomes and wealth by a few, while denying working people decent wages. The second is redistribution – creating tax systems that force extremely wealthy people and large corporations to pay their fair share, and making sure that these resources are used to finance investment in public goods and spending that enhances people’s social and economic rights.
Above, I described the fair and just global tax architecture that is needed. Within developing countries, policymakers must move away from reliance on regressive taxation, such as raising value-added taxes or charging users for essential amenities and public services. Instead, governments should be taxing those with the ability to pay, especially those who have benefited disproportionately from booms, and suffer relatively less during slumps. In low- and middle-income countries that face cross-border capital-flow volatility, such policies need to be accompanied by the right types of public expenditure, and by capital-account management that ensures that the prospect of higher taxes does not spur capital flight by wealthy people and firms.
PS: “India has a robust and admired statistical system,” you recently wrote, but Indian Prime Minister Narendra Modi’s government has been using its power to “control, manipulate, and suppress official data” to reinforce an official narrative that touts the country as the next economic superpower. Just how flawed is that narrative?
JG: No country can hope to be an economic superpower if it does not first ensure that the basic needs of all its citizens are met in a sustainable manner. Here, India has failed miserably: the growth of the past two decades has been accompanied by sharply rising inequality and relatively little improvement in social indicators. While the top 10% of earners and the emerging upper-middle class have benefited from significant income growth, most of India’s enormous labor force is locked in informal employment offering fragile, uncertain, and low incomes and little or no legal or social protections.
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This majority has suffered mightily from policies like the dramatic demonetization of 2016, which hit informal activity hard, and the rigid and ill-planned imposition of a national Goods and Services Tax, which disproportionately affected small enterprises, the following year. The COVID-19 pandemic, which brought harsh lockdowns and little support for workers (especially informal workers), made matters far worse.
Compounding the problem, public spending on health and education has been woefully low. This is reflected in poor human-development indicators, which have actually worsened in recent years in some parts of the country and among some segments of the population. Nutrition indicators have stagnated at very low levels, especially for women and children. Real wages have barely increased, and there are major gaps and inequalities in basic health access.
Instead of recognizing these problems and seeking to address them, Modi’s government has sought to suppress the information available to the public (and to itself!). A consumption survey conducted in 2017-18 was simply shredded, and no such survey has been conducted since, even though such surveys form the basis of poverty estimates and are thus essential to guide most types of public intervention in this area.
Other data are either not collected or not made available to the public. When the National Family Health Survey found that anemia is on the rise among women and girls, and that open-air defecation persists (contrary to the government’s narrative), the head of the organization conducting the survey was forced to resign. We don’t even know how many people there are in India: the decennial census, which was meant to be completed in 2021, has not yet started.
Without reliable data, public policy becomes a shot in the dark. It should be obvious that good governance requires leaders to prioritize the effectiveness of interventions over perpetuating their preferred narrative.
