However, this perspective oversimplifies the complex dynamics of global inequality, especially in the context of developing nations. Instead of an intrinsic flaw of capitalism, the real issue lies in geopolitical tensions, trade restrictions, and the lack of a truly global perspective on economic justice.

This article will unpack the nuances of capitalism, examine the factors contributing to inequality both within and between countries, and highlight what needs to be done to build a fairer world.

The Realities Of Global Inequality

When we talk about inequality, there are two main types: inequality within a country (intra-country inequality) and inequality between countries (inter-country inequality). Historically, the wealth gap between countries was enormous, with advanced economies such as the United States and Western Europe being significantly wealthier than countries in Asia, Africa, and Latin America. However, the past four decades have witnessed a significant shift, primarily driven by the economic rise of Asia and parts of Central and Eastern Europe.

In countries like China and Vietnam, capitalism and integration into global trade networks have helped lift millions out of poverty. According to World Bank data, China alone has lifted more than 800 million people out of poverty since the early 1980s.

Vietnam, another notable example, saw its poverty rate fall from over 70% in the 1980s to below 6% by 2021. This rapid economic growth has resulted in one of the most significant reductions in cross-country disparities in human history, challenging Piketty’s notion that capitalism inherently leads to worsening inequality.

While global inequality between countries has declined, inequality within many wealthy nations has increased. The rise of the billionaire class, stagnating middle-class wages, and the weakening of traditional labour unions have fueled social unrest in countries like the United States.

The infamous “1%” now holds an increasingly large share of national wealth, with Oxfam’s 2023 report revealing that 62% of all new wealth created between 2020 and 2022 went to the top 1% of earners globally.

However, focusing solely on the income disparity within advanced economies, as Piketty did, means ignoring the broader global picture. Western observers often forget that the standard of living enjoyed by even the poorest individuals in advanced economies is vastly different from the extreme poverty faced by farmers in South Asia or sub-Saharan Africa.

For instance, a person living below the poverty line in the United States still has access to public healthcare and infrastructure that are often absent in the world’s poorest nations.

Global Fragmentation And Protectionism

The decline in global inequality between countries is now under threat due to growing geopolitical tensions and the increasing fragmentation of the global economy. This fragmentation is partly fueled by trade restrictions and populist policies that have led to reduced economic cooperation. Such measures pose a serious risk to the world’s poorest countries, which depend heavily on access to international markets.

The COVID-19 pandemic and subsequent disruptions in supply chains highlighted the vulnerabilities of an interconnected global economy. Rich countries responded by turning inward, focusing on securing their domestic economies rather than continuing to support global trade.

The World Trade Organization (WTO) noted that the volume of world merchandise trade shrank by 5.3% in 2020, with the effects felt most acutely in low-income countries that rely heavily on exports.

Furthermore, policies like the Inflation Reduction Act in the United States, which offers substantial subsidies for domestic manufacturing, particularly in green industries, could have unintended consequences.

These moves may undermine the competitiveness of developing countries that depend on the very industries the West is now trying to onshore. The resurgence of economic nationalism and protectionism directly threatens the fragile gains made by developing countries over the past few decades.

The Climate Change Dilemma

One area where there appears to be a consensus for global action is climate change. The consequences of climate change are felt disproportionately by countries in the Global South, despite their comparatively minimal contribution to greenhouse gas emissions. Developing countries are more vulnerable to climate-related disasters, food insecurity, and displacement.

Kenneth Rogoff, a former chief economist at the International Monetary Fund (IMF), has advocated for the creation of a World Carbon Bank, which would provide technical assistance and large-scale climate financing to developing countries. The financing would be provided in the form of grants rather than loans, recognizing the limited capacity of low-income nations to take on additional debt burdens.

This proposal is crucial for ensuring that climate action does not inadvertently exacerbate global inequality. Developing countries need the resources to transition to cleaner energy sources without sacrificing economic growth.

To bridge the financing gap, Rogoff has argued for barring private lenders from suing defaulting sovereign debtors in developed-country courts, thus pushing for fairer terms of international finance.

Strengthening Social Safety Nets

The debate around inequality cannot ignore the importance of robust social safety nets. There is a strong case for expanding public services like education and healthcare within developed countries. But focusing exclusively on domestic inequality ignores the 700 million people worldwide still living in extreme poverty.

According to the World Bank, sub-Saharan Africa remains the region with the highest number of people living below the international poverty line, accounting for more than half of the world’s extremely poor population.

Countries like Norway, which has a comprehensive welfare system, demonstrate how capitalism and social safety nets can coexist effectively. Norway’s model provides a balance, where wealth creation through capitalism is paired with strong redistributive mechanisms to ensure broader access to quality public services.

While Norway’s model isn’t directly replicable in countries with different socio-political dynamics, the principle remains applicable: equitable economic growth must involve policies that provide safety nets for the vulnerable.

The Role Of The Global North

Developed countries have a crucial role to play in reducing global inequality. They have three main options: enhancing their capacity to manage migration, increasing support for low-income countries, or sending citizens to assist directly in those regions.

Many wealthy nations have experimented with programs that encourage recent graduates to volunteer in underprivileged communities abroad. For instance, the Peace Corps program in the United States has sent thousands of volunteers to developing countries, offering technical expertise and fostering cultural exchange.

While these efforts can make a difference, they are no substitute for structural changes in international trade and finance. To create meaningful, sustainable growth in the Global South, advanced economies need to support policies that promote access to global markets. Barriers such as agricultural subsidies in rich countries, which make it difficult for farmers in poor countries to compete, need to be dismantled.

Moreover, there needs to be a shift in political attitudes. As Rogoff points out, politicians in the Global North rarely win elections by promising to help the Global South.

However, the risk that economic instability in poorer countries could spill over into wealthier ones—through migration crises or political instability—is very real and growing. Hence, self-interest alone should be enough to push wealthier countries to adopt more inclusive global economic policies.

The most urgent task for Western leaders today is to find the political will to open up their markets, invest in developing countries, and provide the resources needed for a just climate transition.

Inequality within their borders is indeed an issue, but it pales in comparison to the pressing needs of the billions of people still struggling to make ends meet in the Global South. By shifting the focus from domestic to global, and by recognizing the interconnectedness of our challenges, we can create a fairer, more prosperous world for all.

The post IF Insights: Raking up the debate around capitalism & global inequality appeared first on International Finance.

However, the effectiveness of this strategy remains a subject of debate. Can governments cut public spending to fight inflation? By examining empirical data and case studies, we will evaluate the impact of reduced public expenditure on inflation rates and shed light on the potential downsides of this policy move.

According to the Bank of International Settlements, governments must either increase taxes or reduce expenditures after central banks keep interest rates too low for an extended period in the face of rising inflation, a phenomenon which started in 2022, coinciding with the Ukraine war.

According to the Basel-based organization, which provides advice to 63 central banks overseeing 95% of the world’s economic output, closing the gap between government income and expenditure would “calm down inflation.”

The institution stated that governments that are cutting down on spending or raising taxes would decrease business and consumer demand and be a crucial part of the “last leg” in the fight to tame inflation, which despite an intense run of interest rate rises by central banks around the world is far from over. To slow the rapid pace of price growth, however, this last push would also be the “hardest.”

The BIS took a firm stance amid worries that the United Kingdom’s economy is already entering a recession following abrupt interest rate increases, stating that increased taxes and less expenditure could “contain financial instability risks in multiple ways.”

It would lessen the need for further tightening of monetary policy, apart from providing “additional headroom” should public resources be called upon for crisis management in coordination with central banks.

“It would reduce the possibility that the sovereign becomes a source of financial instability,” BIS stated further.

Despite freezing personal income tax thresholds that will result in an increase of higher rate taxpayers over the next five years, Jeremy Hunt’s March 2023 budget somewhat relaxed the Rishi Sunak government’s purse constraints.

Conservative legislators are unlikely to approve increased taxes given that millions of working households are already dealing with rising mortgage payments and retail costs.

Relationship Between Public Spending & Inflation

Examining the underlying factors that drive inflation is crucial to understand the connection between public spending and inflation. Both demand-pull and cost-push factors can cause inflation.

Demand-pull inflation arises when aggregate demand outpaces the supply of goods and services, increasing prices. Cost-push inflation occurs when production costs rise, resulting in businesses passing higher costs to consumers.

Reducing public spending can directly impact aggregate demand by cutting government expenditure on goods, services, and welfare programs. This reduction in spending can help curb inflationary pressures stemming from excessive demand. However, the efficacy of this strategy depends on the extent to which public spending contributes to aggregate demand in a particular economy.

Amid concerns that the UK economy is already heading into a recession after a succession of sharp interest rate rises, the BIS took a tough line, saying higher taxes and lower spending could “contain financial instability risks in several ways.”

“It would reduce the need for monetary policy to tighten further. It would mitigate the risk that the sovereign itself becomes a source of financial instability,” it added, saying it would also “create more headroom should public resources be called upon for crisis management in concert with central banks.”

Jeremy Hunt’s budget loosened government purse strings slightly despite freezing income tax thresholds that will increase the number of higher-rate taxpayers by 2028.

The Taxpayers’ Alliance has called for further spending cuts but, in opposition to the argument by the BIS, said the funds generated should be used for tax cuts.

If efforts fail to reduce the inflation rate in the short term drastically, the impact on economies could be devastating, the Bank of International Settlements stated, warning that although inflation had come down from recent historic highs, there was still a serious risk posed by a prolonged crisis.

“The longer inflation is allowed to persist, the greater the likelihood that it becomes entrenched and the bigger the costs of quenching it,” the BIS said.

The United Kingdom hasn’t been able to follow the declining trend of European inflation and deservedly, now facing criticisms.

Recent calls for significant government interventions in areas such as financial support for British mortgage holders affected by higher monthly payments came after “decades of reliance on monetary and fiscal policy as de facto engines of growth,” according to the BIS report.

Case Studies On The Impact Of Spending Cuts

United Kingdom

In the early 2010s, the UK implemented austerity measures involving substantial cuts in public spending. Proponents argued that these measures would alleviate inflationary pressures.

However, the National Institute of Economic and Social Research (NIESR) found that austerity had a limited impact on inflation. The study revealed that while public spending reductions slightly lowered inflation in the short term, the long-term effects were negligible. Moreover, the cuts had adverse consequences, such as reduced public services and weakened economic growth.

Greece

During the sovereign debt crisis, Greece implemented severe austerity measures to tackle inflation and stabilize its economy. However, these measures had mixed results. While the move temporarily lowered inflation, the negative impacts on economic growth and social welfare were profound. GDP contracted, and unemployment rose, followed by social unrest, thus hampering the country’s recovery.

Downsides Of Cutting Public Spending

Drastic cuts in public spending can result in an economic downturn characterized by reduced consumer spending and business investments. This can further exacerbate the inflationary pressures arising from weakened economic activity.

Also, reductions in public spending often translate into reduced social welfare programs, healthcare services, and infrastructure investments. Such austerity measures disproportionately affect vulnerable populations, increasing social inequality and hardships for those relying on public assistance.

Public spending on education, research, development, and infrastructure can contribute to long-term productivity gains and creation. Cutting these expenditures can hamper the potential for future economic growth and reduce a country’s competitive edge in the global market.

Also, overly aggressive cuts in public spending can push an economy into a deflationary spiral. Deflation, characterized by a persistent price decline, can lead to decreased consumer spending and business investments, exacerbating economic stagnation.

Conclusion

While reducing public spending may offer short-term relief in curbing inflation, the long-term effectiveness of this strategy still needs to be investigated. Case studies in countries like the UK and Greece demonstrate the limited impact of such measures, coupled with significant social and economic costs. Governments must consider a balanced approach.

The post IF Insights: Can governments cut public spending to fight inflation? appeared first on International Finance.

The MENA region was surprised by the upside in 2022 despite the string of global shocks. In a briefing at the IMF-World Bank Spring Meetings, Jihad Azour, director of the IMF’s Middle East and Central Asia Department, said, “We estimate that real GDP rose by 5.3%, reflecting strong domestic demand and a resurgence in oil production.”

“However, growth is projected to slow this year to 3.1% due to tight policies to restore macroeconomic stability, agreed OPEC+ production cuts, and the fallout from the recent deterioration in global financial conditions,” he said.

Development among MENA oil exporters is anticipated to decrease, from 5.7% in 2022 to 3.1% in 2023, as most of the countries’ critical development drivers transition from oil to non-hydrocarbon activity.

Growth is also forecast to decline in the region’s developing markets, falling from 5.1% in 2022 to 3.4% in 2023. In comparison, low-income nations will continue to lag growth at 1.3% this year as they battle with high commodity prices, macroeconomic instability, and nation-specific fragilities, according to Azour.

He claimed that although the GCC’s growth will be slower due to the OPEC+ production cuts, higher oil prices will compensate for the adverse effects on the fiscal and external balances. However, MENA oil importers may see more significant fiscal and international pressures due to increasing oil prices.

Azour also said that the countries in this part of the world face four challenges in 2023, which are dealing with the effects of inflation, global uncertainty, international financing difficulties, and economic reform developments.

He also explained that dealing with inflation may require increasing interest rates, which affects economic growth. At the same time, uncertainty and geopolitical tensions pervade all global horizons, and their consequences fall on everyone’s shoulders.

He claimed that inflation in the area is expected to hold steady at over 15% in 2023 after skyrocketing last year before mildly falling in 2024.

Meanwhile, talking about MENA, Italian Foreign Minister Antonio Tajani said that his country wants the IMF to start disbursing a loan to Tunisia without conditions.

During a press conference with his Tunisian counterpart, Antonio Tajani vowed to work on Tunisia’s behalf in negotiations with the IMF, repeating Italy’s proposal that the loan be delivered in two tranches and not be fully dependent on all reforms being in place.

“But not utterly conditional on…the conclusion of the reform process. Start financing, encourage the reforms,” he told reporters.

President Kais Saied recently rejected IMF “diktats”, which asked Tunisia to carry out economic reforms and subsidy cuts as terms for the stalled bailout.

Saeed said he would not hear “diktats” from abroad, warning that the subsidies could lead to unrest.

European leaders feared the collapse of the Tunisian economy could increase the migrant crisis further.

Tunisia’s debts amount to about 80% of its gross domestic product, and it reached a preliminary agreement with the IMF in October 2022 for a new USD 1.9 billion loan to help overcome the financial crisis.

However, talks did not bear any fruitful results after Tunisia failed to implement a reform program to restructure more than 100 indebted state-owned companies and lift subsidies on some essential goods and services.

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The strong recovery will also trickle down to next year primarily because OPEC+ mandated oil production and higher oil prices improve business sentiment and attract additional investment. These favourable market conditions have successfully managed to decrease fiscal and external imbalances and have also helped export earnings to recover. However, World Bank has also mentioned that when it comes to the outlook in the medium term, some of the risks like slower global recovery, renewed Covid-19 outbreak and oil sector volatility still remains.

Issam Abousleiman, World Bank Regional Director for the GCC, told the media, “With high population growth and limited options in the private sector, the wage bill has become unsustainable in some GCC countries, as it is a large part of government spending and of the economy overall. Given their improved fiscal situation, this is an opportune time for GCC governments to accelerate their reforms agenda and reach the goals they set for themselves.”

The average GCC wage bill has managed to surpass the Organization for Economic Co-operation and Development’s (OCED) average in the last twenty years, except in Qatar and the UAE, the report mentioned. The civil service allowances in Saudi Arabia rose to SR148 billion in 2019 from SR44 billion in 2016, thereby forming more than a third of the Kingdom’s total wage bill.

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In the 15th edition of the Arab Economic Outlook report issued by the Arab Monetary Fund, it was mentioned that Egypt’s GDP is expected to grow by 5.4 percent in 2022. The report also added saying that the Covid-19 pandemic did not have a major impact on the country’s economic ability to grow, primarily because of the continuous economic reforms that have enhanced its resilience.

The stimulus packages also helped to boost internal demand and aided the positive numbers that we are seeing currently, unlike a lot of other countries that are dealing with lasting economic impact. Some other factors that aided the economy and GDP growth of Egypt are the return of direct flights, successful vaccination campaigns. These helped the recovery of the tourism sector, thereby providing a much-needed boost to the economy.

Recently, the government also announced the second phase of the structural economic reform program that is going to provide an additional boost to the economy during 2022. The country’s economy is expected to grow 5.4 percent next year, assuming the overall recovery of the global economy, and it will further strengthen the country’s tourism sector and external demands.

In other news, Egypt is expected to finalise a $3 billion loan and a part of it will be used to finance sustainable projects as the country attempts to recover from a drop in tourism due to the Covid-19 pandemic.

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According to a report by Kamo Invest, it was observed that the quarterly net profit during Q1 reached up to $40 billion. When compared to that of 2020, it showed a 49 percent increase of $13.2 billion. Additionally, the earnings during this quarter also crossed what was seen during the comparative quarter in 2019 by 4.4 percent. As compared to the fourth quarter of 2020, the quarter-to-quarter growth stood strong at 60 percent. 17 economic sectors also showed year-to-year as well as quarter-to-quarter growth in profits during Q1-2021. Additionally, the other five sectors also reported a year-to-year profitable growth of 42 percent.

Out of all the 21 sectors, the energy sector accounted for the highest amount of profit at $21.4 billion. Profits from Saudi Aramco were up 24 percent year-to-year during Q1 at $21 billion, while the rest of the companies reported a profit amount of $591 million. Along with energy, the banking sector also reported an increased amount of profit during the quarter at $8.4 billion.

Amidst all this, the consumer services, food & staples retailing, and software & services reported a decline in year-to-year profits. According to the report, the decline in consumer services is primarily because of the losses encountered by the companies due to the Covid-19 pandemic.

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The UAE economy’s projected growth will be driven by the energy sector, the media reports said. Also, the UAE’s non-oil economy’s growth will accelerate to 3 percent in 2020 from 1.6 percent in 2019. The country’s non-oil economic rise will be driven by the World Expo 2020 and major initiatives by the government. 

Economic diversification coupled with bold reforms are factors speeding up the UAE economic growth at a steady pace. Expo 2020 Dubai and the UAE government’s Dh50 billion fiscal stimulus is playing a vital role in the country’s non-oil GDP growth. 

In this context, First Abu Dhabi Bank (FAB) published its 2020 global investment outlook report providing key insights into macro-economic trends. 

Alain Marckus, managing director and head of Investment Strategy and Investment Management at FAB, in the report said, “The combination of improving global growth, alongside very low interest rates around the world, should continue to see risks assets do well in 2020. Ongoing global central bank accommodation also should see the emerging markets do well. The economic “long cycle” continues to be extended with opportunities available in value and income strategies, which we think will be the outperformers.” 

Last year, the UAE central bank said that it expected the country’s GDP to rise by 2 percent in the fourth quarter, WAM reported. 

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“The UAE has been alerted early to the importance of startups and SMEs in supporting the national economy and its place in contributing to GDP, ” said Adib Al-Afifi, Director of the National Program for Small and Medium Enterprises (SMEs), Ministry of Economy. “We have introduced the necessary economic regulations and legislation that provide stability to the sector, and to strengthen its position, in order to attract more domestic and international investors.”

Al-Afifi added, “Although this type of investment activity faces many challenges in most developing countries, it is the marketing and administrative difficulties and the low financial potential of these projects, which necessarily lead to weak marketing efficiency. However, the GCC countries, specifically the UAE, has been alerted to these challenges, thus has launched the National Program for Small and Medium Enterprises. We have adopted and promoted these investments as well as provided the ideal environment to enable these projects and impose their presence and competitiveness in the local and international markets.”

According to a new study conducted by one  of the international consulting offices in the region, investments for startups and SMEs in the Gulf region will reach US $2 billion over the next decade, compared to only US $150 million invested in the last ten years.

The United Arab Emirates and Saudi Arabia will play an important role in stimulating the growth potential of the region and in developing startup ecosystem in GCC. This scenario places both UAE and Saudi Arabia at the forefront, developing and sustaining an active startup ecosystem while keeping a solid pace as major international cities race to build their own smart cities using disruptive technologies.

According to investment report statistics 2018 has proven to be a record year for startups in MENA, with 366 recorded deals and an increase of funding by 31%. There was also in an increase of 5% in the number of institutions and angel groups investing in MENA-based startups increasing the number of investing institutions to 155, 30% of which are from outside the region.

UAE’s Ministry of Economy has established the National Program for Small and Medium Enterprises with the aim of empowering SMEs and developing general frameworks and guidelines aimed at providing the necessary expertise, technical and managerial support and training for SMEs.

This emphasis is being shared by the third edition of AIM Startup, a global platform for entrepreneurs which is under the patronage of the Ministry of Economy. Hosted in partnership with the National Program for Small and Medium-Sized Enterprises, AIM Startup will once again support emerging and innovative companies for three days from 8-10 April 2019 at the Dubai World Trade Centre.

AIM Startup anticipates more than 20,000 visitors who will maximise the global networking opportunities onsite. At AIM Startup, innovators are linked with potential investors and can benefit from the investment climate to form collaborative partnerships, facilitate investment deals, and gain knowledge from industry players and thought leaders.

International Finance is a media partner for Annual Investment Meeting.

Register your interest or contact agnes@strategic.ae for any queries.

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The crisis has its roots in the current account deficit, in which the value of imports exceeds the value of exports. The country’s current account deficit has grown four times in the last two years. It touched $18 bn in FY 18, up 42.5% over the previous fiscal year. Two years ago, it was at $4.876 bn and rose to $12.621 bn in the next one.

In 2017, between July and March – about 70% of the country’s import bill was for energy, machinery and metals, according to AFP reports. The import bill ballooned mainly due to higher oil prices and imports from China—which is involved in building several infrastructure projects in Pakistan under the China-Pakistan Economic Corridor programme. Since December, Pakistan has devalued its rupee four times with an aim to make its exports cheaper. The country and its economic policies have suffered, due to corrupt regimes, faulty policmaking and low tax revenues.

Now, the only visible option remaining to Pakistan is to go to the International Monetary Fund (IMF) for a loan. The country has borrowed from IMF more than a dozen times since 1980. Though the total financing gap for the current fiscal is at around $12 bn, the country could not get more than $9 bn from IMF, in accordance to its maxmimum quota. However, this may pose a challenge, as the US itself has warned the IMF to pay Pakistan, as the country is hoping that the IMF can help pay off its China debt.

Even if IMF decides to help Pakistan, it will bring strict conditions that might further devalue the currency. This will severly jeapordise Imran Khan’s new government as well as affect economic growth. Pakistan can also seek Saudi Arabia’s help, but all the Gulf country can do, is defer the oil payments. Borrowing from China is another option, but rising Chinese debt is already a worry for Pakistan. A higher debt burden can prove to be even more of a challenge, as China has already lent Pakistan $1 bn in June to boost foreign reserves.

All things considered, the Imran Khan government has its task cut out in front of it—and a mountain of challenges ahead.

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