From corporate greed to sustainable business practices: how slow and steady wins the race

From corporate greed to sustainable business practices: how slow and steady wins the race

So often we think that ethics and business do not blend, and too often we are proven right. But what if this is not always the case? What if there ...

Reforming the international financial system is no act of charity

Rolph van der Hoeven and Rob Vos are the authors of a chapter* of the recently published book ‘COVID-19 and International Development’. In this blog, they elaborate on their chapter, which is about the international financial system. They urge governments worldwide to implement four reforms, necessary to create more fiscal space and access to adequate external finance for developing countries.

Deep inequalities in pandemic response capacity

The global economic crisis provoked by the COVID-19 pandemic has painfully revealed the fundamental flaws in the international financial and fiscal system (IFFS). While advanced countries could engage in massive fiscal and monetary support measures, low- and middle-income countries lacked such capacities and were hit disproportionally. During the first year of the pandemic (2020), advanced countries provided fiscal stimuli to the tune of 12.5 percent of Gross Domestic Product (GDP) on average. This was three times more in relative terms than the stimulus in emerging and other middle-income countries, and almost 10 times more than governments in low-income countries could provide (Figure 1). This divergence in government support mimicked the inequality in vaccine roll-out.

Figure 1. Fiscal and monetary support in response to COVID-19, as of January 2021

Source: Van der Hoeven and Vos (2022), based on data from IMF (2021), Fiscal Monitor, Database of Country Fiscal Measures in Response to the COVID-19 Pandemic.

Four reforms to overcome financing flaws

As with past crises, a lack of adequate contingency financing forced poorer nations to take a big hit with lasting consequences. While high-income countries could engage in massive, and almost costless fiscal and monetary expansion, low-income countries saw their external debts increase to severe distress levels. In addition, they were forced to devalue their currencies, and curtail economic and social support programs. Consequently, an estimated 100 million to 150 million more people faced hunger during 2020, lifting the total number of people with not enough to eat to 810 million.[1]

The lack of fiscal space and access to adequate external finance for developing countries has its origins in the weaknesses of the International Financial and Fiscal System (IFFS). These structural weaknesses demand four urgent reforms, outlined below:

  1. Establish credible mechanisms for international tax coordination.

Such mechanisms would include, among other things, an internationally agreed, uniform corporate tax rate of approximately 25% to stop tax base erosion. This tax rate would hinder multinational companies shifting their profits to tax havens. Improved tax coordination should further include mandated publication of data on offshore wealth holdings. This would enable all jurisdictions to adopt effective progressive wealth taxes and facilitate the monitoring of income taxes effectively paid by the super wealthy. After years of deliberations, the G20 indeed agreed to a proposal for uniform corporate tax treatment in 2021. Unfortunately, at 15%, the rate is still significantly lower than we proposed, thereby falling short of making a more significant impact on boosting tax revenues and on limiting profit-shifting behaviour.[2]

  1. Establish a multilaterally backed sovereign debt workout mechanism.

Although existing mechanisms to renegotiate sovereign debts with private creditors have improved over the years, they are still far from adequate. This is due to the multiplicity of debt contracts, some of which are not subject to collective action clauses. These collective action clauses are perceived as preventing more drastic action in cases of crises; without them bonds could potentially lose a great amount of their value. A global institutional mechanism to renegotiate sovereign debts should, therefore, be put in place as soon as possible. To this day, sovereign debt solvency problems continue to be solved in an ad-hoc fashion, at little favourable terms to debt-distressed countries. Moreover, they are accompanied by policy conditionality. This leads to unnecessary hardship in affected countries.[3]

  1. Reform of policy conditionality attached to International Monetary Fund (IMF) contingency financing.

While the IMF has recognized the need for enhanced public spending by developing country governments, including those facing debt distress, in practice, however, it continues providing pro-cyclical policy advice. This means that the IMF asks for fiscal restraint, rather than deficit spending when economies are in recession.

  1. Increasing the availability of truly international liquidity by increasing Special Drawing Rights (SDRs) and making these available to developing countries.

As an important step in this direction, the IMF approved the issuance of US $650 billion in new SDRs in June 2021. However, no agreement has yet been reached regarding how these additional SDRs should be allocated to developing countries, and how they can leverage additional investment to foster sustainable development. Had such reforms been in place already, the pandemic response would have provided a fairer level playing field for emerging and developing countries. This would have mitigated the pandemic’s worst economic consequences.


Conclusion

None of these reforms should be seen as acts of charity. They are necessary to facilitate a global economic recovery that is both sustainable and equitable. As in past crises, government leaders have acted with a ‘me first’ attitude, as has been blatantly clear in the roll-out of vaccination programs. Some countries perceived this as a return to protectionism. This form of protectionism was evident in the unprecedented fiscal responses of high-income countries to protect the livelihoods of their own citizens, but which woefully disregarded the fate of people in low-income countries. The governments of those countries did not have the means to protect the livelihoods of their citizens to the same extent. Beggar-thy-neighbour policy responses, however, will affect global prosperity in the long term, and will make the Sustainable Development Goals elusive.


[1]  Laborde, D., Martin, W. and Vos, R. (2021) Impacts of COVID-19 on Global Poverty, Food Security and Diets, Agricultural Economics 52(3) https://doi.org/10.1111/agec.12624, and FAO, IFAD, UNICEF, WFP and WHO. 2021. The State of Food Security and Nutrition in the World 2021.  Transforming food systems for food security, improved nutrition and affordable healthy diets for all.  Rome: FAO. https://doi.org/10.4060/cb4474en

[2] A. Cobham, 2021 Is today a turning point against corporate tax abuse? Tax Justice Network, 4 June 2022

[3] INET. (2021). The pandemic and the economic crisis: A global agenda for urgent action (Interim report of the commission for global economic transformation). Institute for New Economic Thinking. https://www.ineteconomics.org/research/research-papers/the-pandemic-and-the-economic-crisis-a-global-agenda-for-urgent-action


Note

*This blog is based on: Rolph van der Hoeven and Rob Vos (2022), ‘Reforming the International Financial and Fiscal System for better COVID-19 and Post-Pandemic Crisis Responsiveness’, Chapter 2 in Papyrakis, E.(ed.). COVID19 and International Development, Springer

Opinions expressed in Bliss posts reflect solely the views of the author of the post in question.

About the authors:

Rolph van der Hoeven is Professor of Employment and Development Economics at the Institute of Social Studies (ISS)

Rob Vos is Director of Markets, Trade and Institutions Division at the International Food Policy Research Institute.

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What the war in Ukraine and the COVID-19 crisis teach us about our global interconnectedness and its implications for inequality

What the war in Ukraine and the COVID-19 crisis teach us about our global interconnectedness and its implications for inequality

Due to the war in Ukraine not only the country's inhabitants have come under fire, but also the granary of much of the world. If the war is not stopped, ...

COVID-19: the disease of inequality, not of globalization

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Binyam Afewerk Demena is one of the authors of several chapters of the recently published book ‘COVID-19 and International Development’. In this blog, he and his colleagues elaborate on their ...

Toward a postcapitalist economics: Are community economies the answer?

Community economies based on collective action and reciprocity have the potential to help us move toward a postcapitalist economics. However, communities tend to be romanticised and their politics sidelined. (Almost) forgotten economists have some interesting things to say about community economies and how they can be strengthened to contribute to systemic change, writes Irene van Staveren.

Image: Good Energy

My training as an economist did not prepare me sufficiently to tackle the four ‘wicked problems of today – climate change, rising inequality, pandemics, and increasing financial volatility – through my work. The reason for this is that I was taught to take an individualist perspective, which holds that markets generate added value for society and improve well-being, whereas the state merely redistributes this created value. According to this logic, markets are by definition the most efficient mechanism for allocating value, even when this reinforces inequalities. When having to choose between market and state, the market always wins – or so mainstream economists claim. The exception is when markets fail, but then the state may be captured by private interests and hence may not be able to repair market failures. I’ve struggled with this concept ever since coming to the realisation that it simply isn’t working in this day and age.

There is a way out of the binary trap that forces us to choose either government-led or market-based ‘solutions’ that to date have been insufficient. We can look completely beyond either the market or the state to find innovative and hopefully enduring policy options that could help address the four wicked problems. Of course, a global tax floor for multinational companies is very welcome, as is a demand for a temporary waiver of patent rights on COVID-19 vaccines. But systemic change in the economies of both the Global North and Global South may come from an unexpected corner: the community economy.

A number of heterodox economists have mentioned community economies as alternative to the state-market binary either explicitly or implicitly in their work. This triggered my interest, so in a recent book I decided to look at fundamentally different ideas about the economy in which the community economy plays an explicit or implicit role. Interestingly, they do not only have a positive role, as I’ll explain below.

The bad/sad news is that romantics who hope that communities will save the world will be disappointed. Communities are made up of people – the same ones who are also consumers, investors, producers, and workers. Feminist economist Barbara Bergmann pointed at gender discrimination in communities, which affects the attitudes of employers, colleagues, and, through socialisation, even sometimes of women themselves. Indeed, gender norms may constrain women worldwide in their agency and wellbeing, as many feminist development economists have shown.

Thorstein Veblen, the founding father of institutional economics, pointed at another negative effect of communities, namely their tendency for emulation: we look up to the rich, copy their lifestyles, and thereby increase our ecological footprint – we emulate them. And status seeking makes it difficult to shift to a less materialistic lifestyle or even simply to give up the basic comfort of using plastic bags and bottles, for example.

Fortunately, there are also economists who believe in the transformative power of the community economy. Because it can be where collective action for the common good originates, it can provide the social norms for cooperation even if the benefits are not individually, but jointly obtained or are reserved for future generations.

Adam Smith, who is often referred to as the promotor of markets with his metaphor of the ‘invisible hand’, actually used this famous metaphor only once in his foundational economic book The Wealth of Nations. Instead, Smith wrote a whole book titled The Theory of Moral Sentiments twenty years earlier in which he theorised that the community economy was necessary to help markets flourish. Not the other way around, thus.

Let me mention one more almost forgotten economist here: Gunnar Myrdal. This Swedish economist who won a Nobel Prize did an extensive study on relentless racism in the US. In his explanation, he came up with the concept of cumulative causation. He deliberately proposed this as an alternative to the concept of a market equilibrium. In a market, supply and demand are supposed to be independent. But, Myrdal argued, markets are influenced by social norms, attitudes, beliefs, and behavioral patterns.

Why is this important? Just like Veblen before him, he recognised the power of institutions in economic behaviour. But he added a dynamic model to this, showing that one form of discrimination, for example racial segregation in neighbourhoods, triggers another form, such as prejudice among white populations about unemployment and poverty in those neighbourhoods. This in turn feeds other forms of discrimination, such as lower-quality schooling for black children, which subsequently feeds into lower labour market opportunities.

So the important insight from Myrdal was that discrimination is not a linear process that can easily be ended with some legal changes. Instead, he argued, when discrimination is part and parcel of community life, it inevitably affects markets and is self-reinforcing.

The good news is that social inclusion and empowerment follow the same logic of cumulative causation, for example of women in the Global South. For example, with more girls in school and the labour market, African economies experience more growth and human development while at the same time individual girls and women obtain more opportunities, bargining power in the household, and more influence on their fertility.

Challenging unequal North-South relations

I think that these ideas are still relevant today, but now on a global scale. They help us to understand how social norms, attitudes, and beliefs in the Global North affect the Global South through structural inequalities in markets: global value chains, financial markets, labour markets, and even land markets. Hence, global markets tend to constrain the opportunities of people in the Global South to choose their own development paths.

Countries in the Global South are then likely to rely less on global markets and more on the strength of their own communities to help markets flourish. This is an inherently negative development, but it can also have positive dimensions when it comes to a possible economic transformation. Here are three of countless examples of how community economies in the Global South can provide the seeds for postcapitalist economies to develop their own strength in a way that makes them independent from the unequal market relationships with the Global North.

A first example is the increasing popularity of worker cooperatives. We find them in all sectors – from agriculture to manufacturing, and from construction to energy. The strength of these is that the market in which capital hires labour is dissolved. In worker coops, labour owns capital and controls it in terms of investment out of their own pockets, bank loans, and retained profits.

A second example is the decades-old practice of savings and loan associations such as the ROSCAs (Rotating Savings and Credit Associations) in Africa. Here, the market is dissolved by excluding banks and financial market transactions. Communities themselves bring savings and credit together by using rotating schemes or lotteries with all members having an equal position as both saver and lender. The stokvel is a classic example.

A third and last example is community-led energy initiatives. Across the Global South, rural communities which are not yet connected to the national electricity network, or who experience many power interruptions, build off-grid solar power networks. These provide the community with power for light, water pumps, or other basic needs. Again, the market is dissolved, in this case through bypassing electricity firms and national supply and demand of electricity on markets.

Community economies can be key – but don’t romanticise them

The urgent wicked problems that the world faces cannot be addressed by the market, while the state is often not capable of addressing them effectively. The community economy is a likely candidate for systemic economic change. But it should not be romanticised. We need a new balance of power, influence, and innovation between the market, the state and the community economy, with the last one in the lead. How this may be done can be learned from some key insights by (almost) forgotten economists.

Opinions expressed in Bliss posts reflect solely the views of the author of the post in question.

About the author:

Irene van Staveren is professor of pluralist development economics at the Institute of Social Studies (ISS) of Erasmus University Rotterdam. Professor van Staveren’s theoretical interest in is feminist economics, social economics, institutional economics and post-Keynesian economics.

Are you looking for more content about Global Development and Social Justice? Subscribe to Bliss, the official blog of the International Institute of Social Studies, and stay updated about interesting topics our researchers are working on.