The world economy is faced with converging crises – high debt levels, food and fuel inflation, weakening currencies, and a climate emergency that makes the planet’s very future uncertain. It’s a perfect storm for everyone, but it is having a disproportionate impact on poor countries and their poor populations.
Lest we forget
International financial institutions have overly blamed COVID-19 as well as Russia’s invasion of Ukraine for the converging crises that we face today. True, the pandemic as well as what is actually a US-NATO proxy war against Russia have been a tipping point. But they do not fully explain why we are witnessing a string of crises, each of immense magnitude.
The global economy is on a crisis path that is inherent in being more of a market economy rather than a planned economy. The crisis of capitalism has been intensifying since the 1970s, starting with the unprecedented crisis of overproduction that was precipitated by technological revolutions and, especially, greater rivalries between the big economic powers. For almost five decades now, global gross domestic product (GDP) growth has been generally slowing and kept going only by debt and financial speculation. The period has been punctuated by recessions that have become more frequent and more and more severe.
Since the 2008 financial crisis, the global economy has been on a protracted stagnation, and then by some dramatic twist in 2020, took a deep plunge that is the worst since the two world wars. As if this were not enough, in 2022, an international armed conflict erupted that is anticipated to have broader ramifications on critical issues, particularly resources.
The two events definitely accelerated the global economic crisis. But to focus simply on the last two years may leave us in a collective ‘brain fog’ on the real nature of the capitalist crisis. The converging crises are but a manifestation of a pre-existing condition that has only been worsened by the bitter pills of neoliberal policies that countries, especially the so-called developing countries like the Philippines, have been taking in the last five decades. Still, neoliberalism’s apologists have seen the pandemic and conflict as a convenient moment to reboot the global economy by further increasing and expanding neoliberal prescriptions.
As of the first quarter of 2022, global debt is hitting a record high of US$305 trillion that is equivalent to a historically unparalleled 348% of global GDP. The pandemic triggered unprecedented borrowing with the biggest one-year debt surge since World War II, as the International Monetary Fund (IMF) notes in its Global Debt Database.
And then, a series of shocks came along to further shake an already fragile global economy. Rising inflation pushed major central banks to tighten monetary policy with increasing interest rates at regular intervals this year, which in turn increased the borrowing costs for corporations, governments and households. Interest rates hikes also spell higher debt service costs for governments that borrow for budgetary support, smaller companies that borrow to avoid bankruptcy, and households that borrow to cope with food and fuel inflation.
But to say that these are all a ripple effect of the pandemic and the Russia-Ukraine conflict is imprecise. It must be emphasized that the shocks are due to the habitual debt-driven crisis response in order to save corporations and big business, bloat financial profits and increase fictitious capital.
Debt was already elevated even before the pandemic. Since 2008-2009, there have been massive efforts at quantitative easing to increase money supply to be infused in global financial institutions. This has been used for speculation and profiteering from financial and real estate investments, not for the real economy, nor for improving working people’s welfare, nor for equitable and sustainable growth. The current debt wave beginning in 2009 is the largest and involves the most countries in history; it exceeds the waves in 1970-1989, 1990-2001, and 2002-2009, which all ended in financial crises.
The danger moreover lies in the uncomfortable fact that with such debt levels countries run the risk of sovereign defaults. Borrowing by governments account for slightly more than half of the recent increase in global debt and now account for almost 40% of total global debt. Total public debt as of the first quarter of 2022 is equivalent to 103% of the global economy, which is the highest ratio ever recorded.
The IMF justifies the large increase with the need to “protect people’s lives”. But together with the World Bank, they have now attached austerity measures as conditionality to their loans, including cuts in social services, more consumption taxes for the poor to pay, and tax cuts for corporations and the rich. These are being implemented in earnest amid the massive destruction of jobs, collapsed incomes, and worsening poverty.
High oil prices, high oil profits
Oil prices soared in March this year to levels not seen since 2008. Although oil prices have already tapered since August, this only reflects market uncertainty over the direction of the global recession. Most commodity prices are expected to see sharp increases in the remainder of 2022 and to remain high in the medium term.
The war in Ukraine is being pinpointed as the trigger. But it was obvious even before this that oil prices were already climbing rapidly due to increasing demand and limited supply growth. Countries were emerging from pandemic lockdowns, but the oil producing countries including Russia and Saudi Arabia were not increasing production at a commensurate level. Refining capacity was also being reduced, and countries were drawing on buffer stocks. It should be emphasized in any case that it is the commodity traders in exchanges that set oil prices through speculation which plays a major part in the oil market. Current developments have only made traders bid oil prices up, while the war in Ukraine has also triggered fears of sanctions and consequently another higher bid.
It is speculation that rakes in huge profits for Big Oil, which tremendously increased in the second quarter of 2022 alone compared to the same period in 2021: from US$4.7 billion to US$17.9 billion for Exxon; from US$3.1 billion to US$11.6 billion for Chevron; from US$5.5 billion to US$11.5 billion for Shell; and US$3.1 billion to US$9.3 billion for British Petroleum.
More profits from hunger
Global food commodity prices increased by an all-time high of 30% in March this year. Again, this is not simply the result of pandemic lockdown measures and war, although both undoubtedly disrupted supply chains. Rapid food inflation predates the pandemic because, like oil, the production of commodities as basic as food is dominated by global monopolies. Food trade has also been increasingly globalized as well as financialized, thereby subjecting food commodities to the disastrous monopoly behavior of speculation and price making. It may be recalled that one of the financial abuses revealed at the height of the food crisis in 2009 was that food is bundled with fuel commodity indices such that their price movements are synchronized.
But food industry players consistently blame production factors such as oil price hikes, increases in transportation costs and climate change for the global food inflation. It is true that since the turn of the century oil prices have become more and more volatile and in a way problematic for food and agriculture. It is also true that rising costs of transportation and logistics which are crucial in food systems are related to oil price movements and perishability of products. It is also true that extreme weather events have profoundly affected agriculture since the 1990s and accounted for a large part in food inflation. But speculation has continued to push market prices more dramatically than real production challenges have done.
This year, the world’s top four grain traders are seeing record profits and sales: Cargill’s revenues increased 23% annually as of May 31; Archer Daniels-Midland (ADM) made the highest profits in its history as of second quarter; Bunge’s sales went up by 17% year-on-year in the second quarter; and Louis Dreyfus reported 2021 profits increasing by more than 80% from previous year. They are forecasting demand to overtake supply until 2024, which means higher sales and higher profits in the next two years.
Concerns of profiteering and speculation are being raised by civil society organizations, which the global giants of course deny. But there are unpublished analyses suggesting that the food companies have actually increased their profit margins, say from 3.7% to 4.5% for ADM and from 2.5% to 3.2% for Cargill.
Food prices have surged while, according to the World Food Programme (WFP), about 345 million people in 82 countries are experiencing severe food insecurity compared with only 135 million in 53 countries before the pandemic. Olivier De Schutter, co-chair of the International Panel of Experts on Sustainable Food Systems and United Nations special rapporteur on extreme poverty and human rights, has underscored the irony: “The fact that global commodity giants are making record profits at a time when hunger is rising is clearly unjust, and is a terrible indictment of our food systems. What’s even worse, these companies could have done more to prevent the hunger crisis in the first place.”
Because the economy is weak
The response to inflation in advanced economies has always been largely from the financial side. US interest rates are being increased to depress demand, economic growth and consequently inflationary pressures. But this will make debt more burdensome. Debt is however already excessive as it is. The US government is also in effect already just printing money to pay off government deficits and debt. But tightening monetary policy is the only approach in the prevailing global economic architecture – as long as there is a constant flow of money from expanding economies, financial profits, or even more debt.
And this is why the impacts of the converging crises on poor countries are more difficult and more disastrous. After decades of economic liberalization, privatization, and simply being driven by debt and foreign investment, there is the insistence that the policy responses of poor countries to the converging crises remain within the system of free market globalization.
Coming into the pandemic and war, they were already reeling from years of production declines, massive joblessness, low incomes and diminished services – all the result of embracing neoliberal globalization. They were left with collapsed revenues to respond to the pandemic and were only driven further to more borrowings. The debt piles, however, had not actually gone to COVID-19 response, with only a small portion earmarked to such, but were infused to regain and maintain investor and lender confidence in their economies.
At one point, countries like the Philippines were borrowing simply to earn that grade of being creditworthy but not to genuinely stimulate their economies to recovery. The Philippines was the top borrower from the World Bank in 2021 in the name of pandemic response, as the country had the biggest economic output gap in the East Asia and Pacific region, according to the World Bank. But the Philippine government has been penny-pinching on economic recovery and has totally phased out economic relief funds for the poor majority.
Now, the underdeveloped countries are brought into a new period of austerity as debt conditionality, ironically even as their backward economies and the working people have not fully recovered from the economic plunge. Government budgets have only moderately increased, at rates that are even lower than their average annual increases, while portions for debt payments have remained intact.
The Philippine national budget for 2023, for instance, records the least increase in 20 years, which reflects the wrong priorities of the Marcos Jr administration. There are increases in the budgets for the offices of the president and vice-president, infrastructure, defense and debt servicing. Meanwhile, social protection and services, labor, and key education and health programs have been defunded.
Poor countries already dedicate 14% of their domestic income (revenue) to paying just interest on their debt, compared to only 3.5% for rich countries. Including principal payments, debt servicing is even larger than budgets for social services and protection with, as already mentioned, almost none for economic relief and recovery. Instead, in the neoliberal thinking, governments are quick to impose additional consumption taxes (e.g., on e-commerce and platform work) while reducing direct taxes and ignoring wealth taxes because, for them, boosting big business profits is the real economic stimulus.
Average overall government deficits as a share of GDP in 2020 were estimated at -10.3% for emerging and middle-income countries and -5.7% for low-income developing ones. In Southeast Asia, fiscal balances as share of GDP have gotten worse from 2019 to 2021 for 6 out of 10 countries, reaching -26.3% for Brunei, -12.5% for Thailand, and -8.6% for the Philippines, to cite the biggest dips.
The external debt stocks of ‘developing’ countries reached US$11.1 trillion, the highest level on record. This translates into a renewed increase of the average ratio of external debt to GDP from 22.8% in 2008 to 30.6% in 2021. Their government debt-to-GDP ratio, on the other hand, increased from 52.4% in 2019 to 63.5% in 2020. Creditors and investors are not yet worried and consider these numbers manageable because, after all, fiscal responses have been confined to more borrowings and regressive taxation as well as government subsidies for private infrastructure and profits.
The weakening of currencies makes the mounting debts more burdensome. It also accelerates local inflation. Both have a disproportionate impact on the poor populations who have not benefited much from large additional borrowings and will have to go into austerity now and whose household incomes and savings have been wiped out. It doesn’t help to note that food eats up almost 40% of poor households’ expenses, followed by energy, gas and water, and transportation.
Currency depreciation is devastating for the already fragile economies of the underdeveloped countries for two reasons: they have become too reliant on imports; and they have been made to believe that foreign capital, always the magic bullet for economic growth, is now needed more than ever.
Neoliberalism has eroded domestic production. This resulted in chronic and worsening trade deficits, and reduced the ability of local economies to withstand external shocks. Importation would not have been bad per se if these were used to build local industrial strength. But that has not been the case, as even food and agricultural trade deficits have widened tremendously since the World Trade Organization (WTO) imposed an open rules-based multilateral trading system.
In the Philippines, the obsession of the previous Duterte and now the Marcos Jr administration with infrastructure drains foreign exchange earned from exports since infrastructure and real estate corporations import so much of their construction materials. Infrastructure projects practically siphon off public funds as sovereign guarantees or government counterpart, and in the end only subsidize private profits.
Neoliberalism has allowed foreign investment in practically all sectors of the underdeveloped economies including energy, water, transportation, telecommunications, infrastructure, and other public utilities and services. Even their export manufacturing sectors are dominated by foreign corporations which are themselves huge importers of their own raw materials and components. Again, foreign investment could not have been bad per se if it was infused for strategic industrialization. But that has not been the case – the underdeveloped countries merely serve as locations of foreign corporations, providing cheap labor, cheap land, cheap local materials, and cheap infrastructure. Neoliberalism of course has also liberalized profit remittances and investment flows. The demand for foreign exchange has become voracious and incurable.
The converging crises are particularly difficult for the underdeveloped countries because most of their economic foundations are already shattered. They are weak in the face of the converging crises, because they are weak. This is specifically more difficult for their poor populations because neoliberalism is an era of massive joblessness, of jobless growth during periods of growth spurts, and of chronic poverty. Their economies in large part are pre-industrial and based on natural resources that are unfortunately already degraded. At the same time, they disproportionately absorb the impact of degraded ecology and climate-related risks.
Now, governments of poor countries such as the Philippines can only watch as the prices of basic commodities and of oil go up, as currencies fall, as bills and debts pile up, and as their natural resources are extracted. We can’t do anything about it, it’s the world economy – that has been the official line as they take in austerity measures, more debt and speculative financing, techno-fixes, more liberalization, and more profiteering by foreign and big local corporations. These all-too-willing governments, themselves self-interested, are being made by monopoly capitalism to usher in an era of more aggressive neoliberalism that spells more impoverishment, as modern capitalism did centuries ago, through the blood and dirt of its former colonies.