At a time when an existential threat in the shape of climate change crisis is unfolding at quite a fast pace, and there is increasing likelihood of the related ‘pandemicene’ phenomenon happening in the near future, and which requires a unified, and focused global response, geopolitics continues to take centre stage. First, at the twilight of the covid-19 pandemic, it was the war in Ukraine in early last year that accentuated the global supply shock– especially in terms of food and oil– and with it built-in strong stagflationary headwinds in the developing countries, and high inflation in a number of developed countries. More recently, the highly serious geopolitical tension in the Middle East has further put to risk global economic recovery.
Having said that, there is still a lack of the multilateralism needed to actively pursue solutions to these conflicts, so that attention could be paid to transforming economies to much-needed resilience against existential threats, and in reducing the otherwise rising income and wealth inequalities. It is important, therefore, in addition to resolving these geopolitical crises, and to reform multilateralism away from the neoliberal assault of, for instance, market fundamentalism, to fairer rules of the game for all countries, and economic agents, to also rein-in overboard austerity, provide greater debt relief, control tax evasion, and make available greater climate finance.
All the above are important for enhancing the fiscal space of countries, especially the developing countries so that they can make the necessary shift towards much more resilient, and green economies; where development, and welfare, spending is also needed for greater empowerment of political voice, and hence the overall level of democracy in developing countries in particular.
Improvement in democracy in turn, will allow greater influence of the demos in dismantling the chronic issue of elite capture of resources, and public policy, away from serving their vested interests, to more inclusive, and sustainable, economies. Improvement in political voice will also allow, for instance, increasing tax progressivity, and tax base, through greater push by demos for this on public policy. Currently, the lower tax-to-GDP ratio, in many developing countries, is one of the main reasons for narrow fiscal space with them in general.
To enhance fiscal space, it is important to not go overboard with monetary austerity, as currently is the case, whereby instead of correctly seeing inflation to have a significant supply-side determinacy, and to therefore not rely mainly on aggregate demand squeeze policy of keeping interest rates high, but to employ non-austerity policies to unclog supply bottlenecks, so as to diminish stagflationary consequences.
There is a need to not only make an enhanced allocation of IMF’s special drawing rights (SDRs) to the tune of $650 billion, it is also important, as per the ‘Bridgetown Initiative’ to provide a significant, annual SDR allocation to highly climate-vulnerable countries, like Pakistan, for a number of years, given the huge economic transformation the country needs to shift towards a much-more green economy
Lower interest rates will also help lower debt distress of developing countries especially, and will not only increase fiscal space for climate and welfare expenditure, but also will help reduce the imported and cost-push channels of inflation. In addition, meaningful debt relief or moratorium should also be provided to developing countries, especially not much fiscal stimulus could not be provided by them in general, in the wake of the recession-causing covid-19 pandemic, and later on in the climate disasters, especially in developing countries like Pakistan, which are among the top-ten climate-vulnerable countries. Moreover, lower inflation will once again reduce costs, both in terms of development and non-developmental expenditure, which in turn, will likely increase the productive and allocative efficiency of expenditure.
Fiscal space enhancement also requires improving the tax environment, so that tax evasion could be reduced. A report ‘Global tax evasion report 2024’ recently released by ‘EU Tax Observatory’ provided six proposals to improve the situation of tax evasion, which are ‘Specifically, we make 6 proposals: 1. Reform the international agreement on minimum corporate taxation… to implement a rate of 25% and remove the loopholes in it that fosters tax competition. 2. Introduce a new global minimum tax for the world’s billionaires, mimicking what was achieved for multinational companies. 3. Institute mechanisms to tax wealthy people who have been long-term residents in a country and choose to move to a low-tax country. 4. Implement unilateral measures to collect some of the tax deficits of multinational companies and billionaires in case ambitious global agreements on these issues fail. 5. Move towards the creation of a Global Asset Registry to better fight tax evasion. 6. Strengthen the application of economic substance and anti-abuse rules.’
Moreover, noted economist, Jayati Ghosh, in her recent article ‘Global tax evasion: the good and the bad news’ published by Social Europe, pointed out with regard to tax avoidance, and minimum corporate tax rate as ‘…OECD initiative, on ‘base erosion and profit-shifting’ (BEPS), to control tax avoidance by multinational companies shifting their profits to low-tax or no-tax jurisdictions, has not been as successful. …The rate finally agreed was only 15 percent– much lower than the 25 percent median of global rates and close to that in some tax havens. …Even this minimum rate has not however had the expected effect, because of carve-outs subsequently introduced. These include showing ‘economic substance’, which has enabled multinationals to continue to benefit from reporting profits in tax havens by investing some capital and hiring some workers there. As a result, the gains from this measure have been very limited, adding only 3 percent to global corporate-tax revenue rather than the projected 9 percent. And profit-shifting has continued unabated: the country-by-country reporting of profits by multinationals shows that about 35 percent of foreign profits, amounting to $1 trillion, were shifted to tax havens in 2022 – around the same as before.’
There is then the need to provide greater climate finance to developing countries. For instance, Pakistan is a very high climate-change-vulnerable country, and requires heavy climate-related investment, especially after a catastrophic flood that enveloped one-third of the country, and a highly difficult condition in terms of air quality of a number of countries; where for instance, Lahore– the second largest city of the country in terms of population– is reportedly the worst city in terms of air quality.
Moreover, pointing towards the high level of climate financing needed by developing countries, a recent Financial Times (FT) published article ‘Developing countries need up to $387bn a year to adapt to extreme weather, says UN’ highlighted the finding by UN in this regard as ‘Developing countries need up to $387bn a year to adapt to climate change but flows of international public cash are faltering at the same time as the effects of global warming become more disastrous, the UN has said. The UNEP said a finance “gap” of about $360bn was 50 per cent higher than thought. It estimated that between $215bn to $387bn a year this decade would be required, but public multilateral and bilateral finance flows to developing countries had dropped 15 per cent to $21bn in 2021.’
Also, there is a need to not only make an enhanced allocation of IMF’s special drawing rights (SDRs) to the tune of $650 billion, it is also important, as per the ‘Bridgetown Initiative’ to provide a significant, annual SDR allocation to highly climate-vulnerable countries, like Pakistan, for a number of years, given the huge economic transformation the country needs to shift towards a much-more green economy.
