Inflation and austerity plague Global South

Many in Sri Lanka are stuck in poverty as the country faces external debt repayments

The cost of living crisis is bad enough here in Britain, and elsewhere in the so-called “core” of the capitalist system. In much of the Global South it is devastating. Already suffering badly as a result of the pandemic, the poorer countries are being hit by a double whammy. Inflation means that the cost of food and energy is soaring.

But at the same time the remedy imposed by the central banks—higher interest rates aimed at forcing up unemployment—increases the burden on poor and indebted economies.

According to Debt Justice, the Financial Times reports, “Repayments on public debt owed to non-residents for a group of 91 of the world’s poorest countries will take up an average of more than 16 percent of government revenues in 2023,” compared to 6.6 percent in 2011. For some it’s much worse—Sri Lanka’s external repayments make up 75 percent of revenues and Pakistan’s 47 percent.

With characteristic hypocrisy the International Monetary Fund (IMF) in its latest World Economic Outlook admits that austerity, because it “tends to slow GDP growth”, “has a negligible effect on debt ratios”. But it still demands that poor indebted governments implement austerity to beat inflation.

But a remarkable new article in American Affairs by two young intellectuals, David Oks and Henry Williams, argues that the problem lies much deeper. According to them, “There is no widely replicable strategy to develop a country—simply put, to turn it from poor to rich—that does not involve an economy becoming highly industrialised.”

Manufacturing industry lends itself to constantly rising productivity, faces no inherent limits and can absorb large amounts of unskilled labour. From this perspective, “it was the period lasting roughly from 1950 to 1980… that stands in retrospect as a golden age for the cause of global economic development.”

Not simply did Western capitalism enjoy an unprecedented economic boom, but third world states, many of them newly independent, used their power to restrict the impact of global competition and promote industrial development. 

“For the relatively richer economies of the poor world, like Brazil or Mexico, growth was so strong as to place them on trajectories of rapid convergence with Europe and the United States,” they write. 

But this process was cut short as the core economies grappled with stagflation—rising inflation and mass unemployment—in the 1970s. The turning point came in October 1979, when Paul Volcker, chairman of the US Federal Reserve Board, drastically forced up interest rates to quell inflation.

Elites gather as need for radical change grows

  Read More

The result was a global recession, but for the Global South the “Volcker shock” meant debt crisis, the collapse in the price of the raw materials they exported, and neoliberal “shock therapy” at the hands of the World Bank and IMF.

There followed deindustrialisation, as much Third World manufacturing was shut down as uncompetitive. It was accompanied by “deagrarianisation”. Peasant farmers found themselves, as state support was withdrawn, unable to compete with the giant agribusinesses dominating global food production. The poor flocked to the cities in search of casual and irregular work. The result is what Mike Davis called “a planet of slums”.

The exceptions to this pattern—South Korea, China, Vietnam, for example—had states that were strong and geographically well-placed enough to promote manufacturing industries exporting to the world market. 

The figures for global poverty reduction touted by the World Bank are dominated by China’s impact. The other bigger Southern economies such as Brazil and South Africa are increasingly dependent on exporting food and raw materials—mainly to China. As Oks and Williams point out, “The main ‘release valve’ for the worsening economic situations of poor countries has been migration to better shores.” 

Their analysis underlines the futility of the cruel efforts of the likes of Rishi Sunak and Suella Braverman to “stop the boats”. Mass migration is an inevitable consequence of global poverty. Oks and Williams conclude their article proposing some “structural reforms”. It’s good to look for alternatives to neoliberalism, but the truth is the only solution is revolution.