No solutions in sight as the world stares at imminent economic recession
Both the IMF and World Bank now concede that an economic recession is imminent but neither institution wants the war in Ukraine to end nor lower interest rates
International Monetary Fund (IMF) managing director Kristalina Georgieva too has now admitted that the world economy will slow down in 2023 to a point where as much as a third of it will see an actual contraction in GDP.
This is because all the three major economic powers in the world, the US, the European Union and China, will witness slowdowns. Of the three, Georgieva believes, the US will do better because of the resilience of its labour market, which in fact provides some hope for the world economy as a whole.
There are two ironies inherent in what she said. The first is that the best prospects for the world economy today, even the IMF appears to concede, if only implicitly, lie in the income of workers in the US not plummeting. For the IMF, which has systematically advocated wage cuts as an essential part of its stabilisation-cum-structural adjustment policies, this is a surprising, though welcome, admission.
Of course, Georgieva, many would argue, sees the US labour market resilience as a result of the country’s economic performance and not as its cause. But that she considers it a “blessing” (if not an unmixed one) shows that she recognises the role of workers’ incomes in sustaining demand.
Some may contend that IMF’s stabilisation-cum-structural adjustment policies are typically for economies in crisis—as a means to overcome these crises, not as a panacea for growth—and so this does not indicate a fundamental shift in the IMF’s understanding of labour and its stabilising role in an economy.
But what the IMF is now saying is certainly not aligned with what it usually says; it is in effect conceding that a resilient labour market in the US is actually beneficial for its growth, which begs the question: why should other economies too not attempt to have resilient labour markets even when they are in crisis, and tackle their crises through other, more direct, means like import controls and price controls?
The second irony is her recognition that such a resilient labour market, while being beneficial for US growth, will simultaneously keep up the inflation rate in the US, forcing the Federal Reserve Board to further increase interest rates. This has two clear implications.
First, it means that the US growth rate, while being less affected for the time being, will inevitably be constricted in the months to come as the Fed increases interest rates. The US doing better than the EU and China in 2023 is, then, not a phenomenon that will last long.
Since a poor performance by the US will have an adverse effect on the world economy as a whole, this amounts to saying that world recession will worsen in the months to come, unless China’s Covid situation improves substantially. In other words, even if only a third of the world economy faces a recession in 2023, much larger swathes of it will be similarly affected later.
This is certainly the most dire prediction of the future of capitalism at this juncture coming from any of its major spokespersons.
The World Bank too has been warning of a serious recession looming over the capitalist world and discussing its implications for third world economies. In September 2022, it put out a paper in which it expected a 1.9 per cent growth of the world economy in the year 2023.
Both the IMF and the World Bank, however, attribute the looming recession primarily to the Ukraine war and the inflation it has given rise to (and also in passing to the pandemic); the response to that inflation in the form of an all-round increase in interest rates is what underlies the current threat of recession.
This analysis first of all is erroneous; because long before the Ukraine war, inflation had reared its head as world economy had started recovering from the pandemic. At that time such inflation was attributed to the disruption in supply chains caused by the pandemic, though many had disagreed with this analysis even then.
They had pointed out that the inflationary upsurge owed much to the jacking up of profit-margins by large corporations in anticipation of shortages. The Ukraine war occurred against this backdrop of an ongoing inflation, and added to it quite gratuitously as western powers imposed sanctions against Russia.
A look at the movement of crude oil prices confirms this conclusion that the Ukraine war is not the genesis of the inflationary upsurge. The rise in Brent crude prices occurred primarily in 2021 as the world economy started recovering from the pandemic: the rise between the beginning of 2021 and the end of that year was by more than 50 per cent, from 50.37 dollars per barrel to 77.24 dollars per barrel; the corresponding rise in 2022, during the Ukraine war, was from 78.25 dollars to 82.82 dollars, i.e. by 5.8 per cent, which is less than the current inflation rate in most advanced capitalist countries, even though inflation is generally claimed to have been driven by oil prices.
It’s true that immediately after the imposition of sanctions against Russia, world oil prices did shoot up, reaching a high of 133.18 dollars per barrel during 2022, but then they came down quite as sharply as we have seen; so blaming the Ukraine war for the price rise is not only misleading (as it is not the war per se but the sanctions that were responsible) but also erroneous (as prices should have come down when the price-rise induced by the sanctions abated).
It is not just the analysis of the Bretton Woods institutions that is flawed. Even more noteworthy is the fact that they have no perception whatsoever, even within the terms of their own analysis, of how this world recession is going to end.
If, as they believe, it is the Ukraine war that is responsible for the looming recessionary crisis, then they should, at the very least, have hoped for an early end to it. That however is unacceptable to western imperialism, which wants the war to drag on so that Russia is “bled” into submission; this is why the twin institutions express no opinions on the need for ending the war.
But even if they chose to remain silent on the question of ending the war, they could have expressed some opinion about tackling the inflationary crisis in some other way than by raising interest rates and unleashing a recession. The IMF and the World Bank however are so committed to free markets that they cannot contemplate any other inflation-control measure (such as direct price-control), even as they lament the recessionary effects of interest rate hikes.
Likewise, even as the World Bank president David Malpass commiserates with debt-encumbered third world countries which are going to be badly hit in the coming months, and acknowledges that a large chunk of their debt burden has arisen because of the high interest rates themselves, there is not a word in his speech in favour of lowering interest rates.
Both the Bretton Woods institutions in other words are long on commiserations but short on concrete measures to help the world’s poor.
This is not just a symptom of timidity. It points to something deeper, namely a genuine impasse in which world capitalism finds itself today. If the structure of western imperialism as it has evolved over the years is to be kept intact, then the metropolitan countries have to keep the Ukraine war going, in which case inflation at the current pace and consequent unemployment become unavoidable. World capitalism taking this route, however, should not come as a surprise.
Published: 22 Jan 2023, 8:30 AM