KUALA LUMPUR, Malaysia, Nov 19 (IPS) – Western monetary policies have been depressing economies around the world. After being urged to borrow heavily for trade, developing countries are now grappling with the contractionary monetary policies of the West.
Central banks
‘Unconventional financial methods’ in the West helped to slow the global recession after the 2008 global financial crisis.
Western central bank efforts have tried to check inflation by reducing demand and raising interest rates. Higher interest rates have worsened the contractionary trend, exacerbating the global situation.
Despite major supply-side disruptions and inappropriate policy responses from 2022, energy and food prices have not risen similarly. But interest rates remain high, apparently to achieve the 2% inflation target.
Although it has no solid basis in either theory or experience, this 2 percent inflation target – which was indecently set by the New Zealand Finance Minister in 1989 to fulfill his “2 by ’92” slogan – is still accepted by the monetary authorities of many rich nations!
For more than three decades, the central ‘independent’ banks aggressively pursued these monetary policy objectives. Once raised, Western central banks did not cut interest rates, apparently because the inflation target has not been met.
Independent monetary boards and other budget-cutting pressures in many countries have further reduced the space for monetary policy, pushing demand, investment, growth, jobs, and income into vicious cycles.
Debt problems
Before 2022, the tendency for the meltdown was reduced by unconventional monetary policies. ‘Quantitative easing’ (QE) provided easier credit, leading to more money creation and debt.
QE also made finance more readily available in the South until interest rates rise in 2022. As interest rates rose, the pressure for austerity increased, ostensibly to improve public finances.
Policy space and options have decreased, including efforts to implement development and expansion interventions. A reduction in government spending power in a counter-cyclical fashion has worsened the recession.
Comparing the current situation with the 1980s is instructive. The eighties began with financial and credit crises, which caused Latin America to lose at least a decade of growth, while Africa was set back by almost half a century.
The situation is worse now, as debts are very high, while government debts are increasing from commercial sources. Debt settlement is also very difficult because of the variety of creditors and loan situations involved.
Different concerns
With full employment largely achieved through monetary policy after the global financial crisis, US policymakers are not too busy creating jobs.
Meanwhile, the US ‘great right’ enabled its Treasury to borrow from the rest of the world by selling bonds. Therefore, the US Fed’s higher interest rates from 2022 have had diminishing effects around the world.
With the European Central Bank (ECB) following the Fed’s lead, a concerted rise in Western interest rates has drawn funds around the world.
Western interest rates remained high until they changed in August 2024. Developing countries have long been paying huge premiums over Western interest rates.
However, high interest rates due to the policies of the US Fed and the ECB have caused money to flow to the West, mainly fleeing low-income countries from 2022.
However, growth and job creation remain a global policy, especially for governments in the Global South.
Long-lasting posture
Why has the landscape taken so long? Although urgently needed, international cooperation is declining.
Meanwhile, international conflicts have increased with geopolitical considerations. The escalation of collective sanctions driven by geopolitics has also disrupted international economic relations.
Barack Obama’s ‘pivot to Asia’ started a new Cold War to isolate and surround China. National responses to the COVID-19 pandemic have exacerbated supply-side disruptions.
At that time, the use of weapons of economic policy against the enemies of the political state has become common, often in violation of international treaties and agreements.
Such new forms of economic warfare include denying access to markets despite commitments made by the establishment of the World Trade Organization in 1995. Trade liberalization is in retreat from the protectionist response of rich countries to the 2008 global financial crisis. Globalisation’s promise that trade integration would ensure peace between economic partners was betrayed.
Since Trump’s first term in office, geopolitical considerations have greatly influenced foreign direct investment and international trade.
US and Japanese investors have been urged to ‘re-shore’ from China with limited success, but appeals to ‘friend-shore’ outside China have been more successful.
Property and contract rights had long been considered almost sacrosanct. However, confiscations driven by geopolitics spread quickly.
The financial war also ended Russia’s access to SWIFT financial transaction centers and the confiscation of Russian assets by NATO allies.
The Biden administration has expanded such efforts by using the weapons of American industrial policy to limit the access of ‘enemies’ to strategic technologies.
It aggressively moved some operations of the Taiwan Semiconductor Manufacturing Corporation to the US, although with little success.
Canada’s lengthy detention of the daughter of 5G pioneer Huawei – at the behest of the US – has highlighted the West’s growing technology war with China.
Unsurprisingly, inequality – both national and international – continues to deepen. Two-thirds of global income inequality is international, complicating the North-South divide.
IPS UN Bureau
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© Inter Press Service (2024) — All Rights ReservedOriginal source: Inter Press Service
