Corruption and Predation in Exercising Power: Algeria and Iraq as Case Studies by Nahla Chahal, Professor and researcher of political Sociology, Editor in Chief, Assafir Al Arabi.
All throughout 2020, Assafir al Arabi conducted a study on corruption as one of the pillars of power, just as important as repression, impoverishment, and despair. For such exercise, we chose Algeria and Iraq as case studies, hoping to extend our research to include other countries. This work will appear in the Books of Assafir al Arabi in three languages, Arabic, French, and English, and their online versions.
The following studies seek to examine corruption in Algeria and Iraq. They do not tackle its manifestation as bribes or looted public funds, but rather as a major governance mechanism, an essential part of its structure and operations.
Corruption is no self-treatable symptom; it cannot cure itself nor can its tailored arrangements; rather, it is channelled to empower a ruler(s), to sustain and perpetuate their power and hegemony. It could be more effective than oppression; takes on various shapes and forms; attacks society by taming it into submission, talks people out of pursuing change, and impoverishes them.
Corruption infests everything and partners with many people to various extents. Alternately, it asks for their complicity, or their acceptance thereof, at the very least, to simplify their lives. It remunerates certain social strata in particular, which happen to be fused with the ruling powers, for matching ideological considerations at times, and tribal-sectarian affiliations at others.
Numerous studies tackle corruption as a question indicative of imprudent governance, lack of transparency, collapsed mechanisms of oversight and accountability, or faded rule of law. The question of corruption has been widely contextualised in theory and through international standards outlined by organisations like the World Bank, the International Monetary Fund, and Transparency International. Those focused on nepotism, theft, and lining influential people’s pockets; they proposed measures to protect whistle blowers, enhanced access to information, made way for civil society, and instilled social accountability; all of which have contributed to the creation of an extensive useful database.
But to focus on those alone would be limiting, as they capture neither dynamics nor functions of corruption. Certainly, all such aspects of corruption must be interconnected somehow, given meaning and rendered a real “configuration”. The studies presented here precisely seek to examine such hypothesis and identify the circumstances that make corruption flourish.
There is, of course, a direct relationship between rampant corruption and failed national liberation –or its defeat– for getting rid of older colonialism is no complete realisation of that end – liberation. Massive privatisations also accompanied such failure and opened up new doors for corruption. Furthermore, real decision-making mechanisms may be seen hiding behind decision-making formalities, whether in ministerial cabinets or parliamentary buildings. Interchangeably, it hides behind decrees. Namely, corrupt practices take legal cover.
In his paper on Algeria, “Corruption as a Configuration of Power,” Daho Djerbal (1) argues that corruption is deemed institutionalised not only when widespread, but also when organised on the basis of socio-economic clientelist networks entrenched within the State apparatus, then disseminated into society through alternating intermediaries. It emerged fiercest, he says, when the State monopolised economy – in both capitalist and socialist paradigms.
Corruption is a configuration of economic rent which began as a system of economic and political regulation, whereby relations between State and its institutions, enterprises and their partners, civil society and its organisations, are all subject, by hook or crook, to rent-seeking logic instated to allocate all national resources (human, natural, financial, technical, and organisational), develop them, and distribute their generated revenues. Corruption thus became a “rite of passage” to accessing numerous public services.
As for decrees, Djerbal considers them as means for elected assemblies and democratically appointed authorities to avoid discussing major topics at hand. Those are tools invented to ensure wider reproduction of this system of new profits, to render the executive branch as sole party in charge of economic evaluation, and to arbitrage between conflicted interests for the sake of increasing revenues and systematise their redistribution. He also considers corruption and democracy as interlinked. As such, the emergence of “pragmatic practices” assumed by the authorities rely on a system of “remunerations, gift exchange, the fragmentation of spheres, places, and actors who determine what is legal and illegal, moral and immoral, legitimate and illegitimate…”
To illustrate his reflections, he gives a number of real-life examples from Algeria and analyses exposed “scandals”, the logic behind their trials, and the verdicts reached against their protagonists.
In investigating corruption in Algeria, Rachid Sidi Boumedine (2) wonders about what could be defined as corruption. He notes that one culturally distinguishes between corruption and bribes, commonly called “tchippa” or “qahwa,” that is, money ordinary citizens pay to buy access to services (mundane, occasionally) or any other goods, though already granted by virtue of law. One feature of a clientelist system is embodied in excessive authorised violations, starting from the highest ranks of the hierarchy, which simultaneously places the lower ranks at the mercy of executive circles, who could, in turn, punish the former for violation of the written law, if there need be.
Boumedine also notes how rentier networks function “internally”, like a clan (a family, village, affiliated community). As such, familiar arrangements of gift-exchange and mutual donations -characterised by their binding and impactful nature- create a favoured system of rights and obligations in society. Such principles consolidate a clientelist system by creating, nourishing, and sustaining reciprocal obligations among its members. He also claims that the system in Algeria has become neo-patrimonial.
This configuration of looting and corruption thus draws upon social acceptance for sustenance. As such, at least in part, it is not considered as theft carried out at the expense of the larger public. Such ideological design –which legitimises looting, whereby the latter is an act directed against an anonymous, undefined, long-hated state after all– thus becomes a gateway to a new social paradigm. He illustrates the question through describing those recurring handouts to the “poor”, or housing opportunities delivered in accordance with ever-contested lists – fashioned along surreptitious criteria. These operations further plunge their beneficiaries into that recognised mire of a clearly unjust system. It is a system that benefits whoever knows their way around maintaining good relations with network agents, ensuring access to those lists.
In their cowritten article reviewed by writer Omar Aljaffal (3), researchers Mohsin Ahmad Ali (4) and Abdul Rahman Al-Mashhadani (5) consider how the 2003 US occupation of Iraq –which toppled the political regime, dismantled the foundations of the state, reformulating them in accordance with US visions and under the administration of the “American civil governor of Iraq”, Paul Bremer– resulted in the transformation of corruption from a manageable and resistible phenomenon into a system protected by laws and legislations. It was thus turned into a daily practice protected by force of weapons, media, platforms, and religious fatwas.
The writers see the destruction of the public sector in the monopolisation of secure jobs by the ruling power and its parties. Those jobs are thus used as a card to purchase voter power in parliamentarian elections, whereby parties promise their supporters and clans jobs in return for their electoral vote. Subsequently, the number of government employees would reach 4.5 million, as opposed to 880 thousand employees in 2003. The two researchers claim that corruption developed and transformed into an “acceptable” social phenomenon after 2003, accompanied by a political shift towards a market economy led by political parties that landed with the occupier and/or emerged after 2003. Those parties have sectarian and racist agendas. Those parties ratified regulations and laws that furthered their interests, such as the “Jihad military service” – for people who had established organisations of armed resistance against Saddam Hussein’s regime and for “political prisoners”. As such, we do not stand before one type of corruption only (which manifests in bribery, among other illegal activity), but also before corruption protected by a legal framework that includes a larger range of different economic activities, subsequently rendering the country’s riches into material up for grabs to those in power and control, inside and outside Iraq. Between 2003 and 2018, financial crimes hit unprecedented records while financial waste surpassed $350 billion. The two researchers also affirm a close connection between intensified and aggravated corruption and external factors that instigate and encourage it. Many cases of corruption are thus entwined with external objectives abroad. Their article tackles manifestations of corruption throughout Iraq and its sectors, as well as those tools used by the ruling power to perpetuate its rule and those it uses to appease society.
Overall, research on corruption faces various challenges, some of which are obstructive indeed. Those include lack of published data, prohibited access to documents, lack of documentation in the first place, mistrust in researchers, and the potential harm that threatens the latter should their research be published. Additionally, research faces challenges that pertain to researchers themselves, from sticking to one familiar methodology they are prone to reproduce, to the scarcity of institutions capable of embracing and supporting them, or lack thereof, to competing over whatever little is available, all the way to declining intellectual standards and knowledge in general, and so on.
Ultimately, the endeavour we undertake here goes with an unexhausted obsession with searching and trying. It questions the way existing powers rule our countries. Along with the contributing researchers, Assafir Al-Arabi thus hopes to have tackled some of the aspects that could answer such a fundamental question.
1- Daho Djerbal is a historian. He teaches contemporary history at the University of Algiers 2. Besides his extensive research on economic and social history, he studies the relationship between history and memory. He has been the director of Naqd publication, a review of social studies and critique, since 1993. 2- Rachid Sidi Boumediene is both scientist and sociologist. He published a number of books and articles throughout his career as academic and consultant in both Algeria and abroad. 3- Iraqi poet and writer. He recently worked on a project that analysed Basrah’s local government in Iraq, as part of a “conflict resolution studies program” at the London School of Economics and Political Science (LSE). He received the Mostafa Husseini Prize for young journalists in 2017. 4- Professor of political economy at the University of Basrah. 5- Senior lecturer at Al Iraqia University, specialised
The Region is wrestling with oil demand slowdown but construction recovery is predicted for 2021 and 2022, GlobalData report as per Dominic Ellis of Construction Global who elaborates on the MENA construction output growth forecast sees 4.5% drop.
18 December 2020
Region wrestling with oil demand slowdown but construction recovery predicted for 2021 and 2022, GlobalData report says
The construction output growth forecast for the Middle East and North Africa (MENA) region for 2020 predicts a contraction of 4.5 percent this year, before a recovery with growth of 1.9 percent in 2021, and 4.1 percent in 2022, according to GlobalData.
The region is wrestling with two distinct but related issues: climate change, and the slowdown in oil demand.
The data and analytics company reports that the 2020 contraction reflects the severe impact of COVID-19 lockdowns, as well as other restrictions on construction activity. Much will depend on its ability to embrace digital transformation.
Yasmine Ghozzi, economist at GlobalData, said: “The construction sector will face headwinds in 2021 with a slow recovery, but the pace of recovery will be uneven across countries in the region. Throughout 2020, and running to 2021, spending on real estate megaprojects, especially in the GCC, is likely to take a backseat as a result of budget revisions.
“However, large-scale projects in the oil, gas, power and water sectors have gained traction against the downturn in market conditions this year, and this is likely to continue. As a result, some local contractors are pursuing development in these sectors to replace the loss of real estate work.
“There is also a push towards decoupling power and water production across the region to reduce energy consumption continuing to provide the impetus for Independent Water Projects (IWP) implementation and in the future, there will be a lot of contract awards in that respect as the region pushes its renewable energy programme, particularly solar photovoltaic and wind.”
GlobalData has slightly revised up its forecast for Saudi Arabia’s construction output to -1.9 percent from -2.8 percent and expects a recovery for the sector of 3.3 percent in 2021. This revision reflects an improvement in economic performance and the Kingdom ending a nationwide curfew at the end of September, lifting restrictions on businesses after three months of stringent curbs and a notable decrease in infection rate.
Recovery is also underlined by the crown prince’s announcement in mid-November that the Public Investment Fund (PIF) is to invest £29.5 billion (5% of GDP per annum) in the economy in 2021-22.
Nearly half of the construction of the five minarets of the Grand Mosque in Makkah is now complete.
GlobalData still maintains its forecast for construction output growth in the UAE of -4.8 percent, with a rebound in 2021 of 3.1 percent and a promising medium-term outlook.
Ghozzi adds: “The recent approval of a new Dubai Building Code is a positive development for the UAE. The new code outlines a revised set of construction rules and standards and seeks to reduce construction costs by streamlining building rules.”
The UAE is proceeding with plans to expand its production capacity with Abu Dhabi National Oil Company (ADNOC) announcing its five-year investment plan worth £90.1 billion.
Qatar, Kuwait, and Oman
GlobalData has not changed its estimated growth rates for Qatar and Kuwait in 2020, at -4.5 percent and -9.5 percent, respectively. However, it has further cut the growth forecast for Oman to -10.3 percent from an earlier estimate of -8.1 percent, as the construction industry struggles with the challenges presented by the outbreak of COVID-19, low oil prices and the impact of sovereign credit rating downgrades.
Ghozzi adds: “The new fiscal plan launched by the Omani Government to wean itself off its dependence on crude revenues through a series of projects and tax reforms is a good step which will aid the construction sector recovery in the medium term”.
GlobalData expects construction in Egypt to grow at 7.7 percent in 2020, slowing from 9.5 percent in 2019 – given a short-term slow down due to the pandemic – and 8.9 percent in 2021. The industry is also expected to continue to maintain a positive trend throughout the forecast period.
Ghozzi continues: “Egypt has become the first sovereign nation in the MENA region to issue green bonds with a £553.9 million issuance. Bonds’ earnings will be used to fund projects that meet Egypt’s commitment to the UN goals for sustainable development.”
Egypt’s comprehensive development plan provides varied opportunities for construction companies, such as the national project to develop the countryside which targets 1,000 villages nationwide.
GlobalData expects Israel’s construction industry to contract by 8.9 percent in 2020, reflecting the significant fallout from the pandemic, with growth expected to resume at a modest pace in 2021.
Ghozzi said containing a second wave of the virus, while trying to revive the economy and approve budgets for 2020 and 2021, are the government’s top priorities. “However, difficult decisions will be postponed, with the deadline to pass the 2020 budget being pushed to the end of 2020,” he said.
In the Arab Maghreb, GlobalData maintained its forecasts for construction growth in 2020 for Morocco and Algeria to -5.5, and -3.4 percent, respectively.
Ghozzi adds: “Amid a second wave of COVID-19 with restrictions placed on public mobility along with increasing public sector doubt about economic prospects and social tensions continuing to cause shutdowns at oil and phosphate-manufacturing facilities, GlobalData has further cut its forecast for Tunisia to -13.3 percent from an earlier estimate of -12.5 percent.
“Recovery in the sector is expected to be very slow and expectation of an early legislative election is likely in 2021 but is unlikely to reduce political volatility.”
It has, in the recent past, been question of supplying Electricity from North Africa with notably the quickly miscarried project of Desertec. Could there be a revived or rebirth of the same or potentially the inception of the same? Would this explain the long and quiet convalescence of the Algerian president in Germany? In the meantime, kinimodin his WP page, wonders whether Energy from North Africa: h2 or hvdc?
The German energy demand is currently only covered to 17 % from renewable sources, albeit with an increasing tendency of half a percent per year (statista.de).
So 83 % are still missing for a complete decarbonization. The majority of this, namely 71 % of the total requirement, is currently covered by imports (weltenergierat.de). To do this, writes pv-magazine.de, we have to increase our photovoltaic area tenfold and our wind energy generation four times – a goal that many consider unattainable due to the acceptance problems of Germans.
One way out might be to import electricity and hydrogen on a large scale in the future instead of oil and gas. Then the gigantic solar fields would not cover German meadows, but Spanish, North African or Saudi Arabian desert areas, a win-win solution. Another advantage are supposedly the costs: since the capacity factor in Germany is only around 0.1, i.e. a 1 kW system only produces as much electricity in 10 hours as it would produce with one hour of full power, this factor in North Africa is 0.2 or higher (globalsolaratlas.com). For the same annual amount of energy, only half as much solar panel space is required, which is why solar power produced there costs only about half – or less. The countries there would have a slight additional income (which of course would increase the energy price again a little) and we would be rid of some of our energy worries.
There are roughly two paths for this solution:
Electrolytically produced hydrogen, that is either liquefied directly or converted to ammonia with atmospheric nitrogen and then liquefied – which requires slightly less complex transport ships. It can also be transported by pipeline.
Direct transmission of the solar power, perhaps buffered with storage for the hours after sunset, via HVDC lines.
What about the costs?
Renewable electricity is considerably cheaper in the MENA region (Middle East, North Africa) and southern Europe than here. In Portugal, solar power projects for 1.12 euro cents / kWh were agreed this year. In 2030, solar electricity costs are likely to be well below 1 c / kWh. In Germany, the electricity production costs for solar power are already below 4 c / kWh (solarify.de). In its position paper, the Federal Association of the New Energy Industry expects solar power production costs in Germany to be around 2.5 c / kWh, with storage adding another 1 ± 0.5 c.
Electricity can be transmitted with high voltage direct current (HVDC) lines over thousands of kilometers with little loss. In China there are some very long connections that bring wind power from the west to the industrial zones in the east. Starting in 2027, Singapore will receive a fifth of its electricity from a gigantic Australian solar field via the Suncable project – via a 3700 km long HVDC submarine cable. This electricity is supposed to cost 3.4 UScent / kWh. A storage facility in Australia will then still provide electricity in the evening hours (Forbes).
Generally, a 3000 km line adds 1.5 – 2.5 c / kWh to the electricity price (EIA study).
This means that the transport costs for MENA electricity are higher than the corresponding doubling of the German solar area (in 2030).
The cost of hydrogen consists of the cost of electricity, the cost of the electrolysis, which is mainly determined by the high investment for the electrolysers, and the transport costs.
For 2030 we can estimate electricity costs of 1 c / kWh for the south and 2.5 c / kWh for Germany. Storage costs of 1 c / kWh that may be reasonable are incurred everywhere.
The electrolyser costs in 2030 are given by Prognos as 2 – 8 c / kWh, in the EWI study with 1.5 – 2.4 c / kWh. They should be the same for all manufacturing regions.
According to the EWI study, the transport method is crucial for transport costs. If an existing pipeline can be rededicated and used for hydrogen, as is the case for southern Spain, they are low at around 0.4 c / kWh. However, if a ship has to be used, they rise to around 3 c / kWh because of the liquefaction required for this – or the conversion into ammonia and the subsequent liquefaction and the use of specialized ships.
With a little optimism we will end up with a hydrogen price of around 5 c/kWh for local production, around 4 c/kWh for southern Spain (pipeline transport) and around 6 c/kW for MENA production.
Electricity via HVDC would cost around 3.5 c/kWh, similar to the Sunline project, which roughly corresponds to the price for locally generated electricity.
Facit: Electricity from the south is not cheaper for us than local electricity because the electricity transport eats up the cost advantage. For H2 we can save a small cost advantage with pipeline transport if the pipeline already exists and only needs to be rededicated. In the case of ship transport, however, the hydrogen becomes considerably more expensive.
Since we will need a lot of electricity and also hydrogen for the decarbonisation of the economy, it may be necessary to obtain electricity, hydrogen or both from the south due to competition for land. Here, southern Spain is the cheapest export region, as both electricity and hydrogen transport infrastructure already exist. Electricity from North Africa would best be transported to Europe via HVDC and only converted into hydrogen there, because the transport costs for hydrogen by ship would be higher.
PhysOrg in this article titled ‘Turkey: Europe’s top destination for… trash’ by Raziye Akkoc is a little an anti-thesis to its so-called and recent foreign adventures from the Caucasus to North Africa.
Tonnes of plastic packaging destined for recycling from popular British supermarkets like Sainsbury’s and French frozen food retailer Picard is instead ending up being dumped illegally in Turkey as the country has become the top destination for European waste.
Recycling firms in Turkey defend the rise in imports, arguing the waste plastic is needed for the growing industry which allows the reuse of material that otherwise clogs landfills for decades.
But the environmental consequences are increasingly hard to ignore, with illegally dumped plastics visible around the growing number of sites in southern Turkey where European plastics are meant to be processed.
There are at least 10 known sites. AFP visited three last month and a reporting team came across a fourth by accident after discovering a fresh load dumped on the side of a road in southern Adana province.
Piled in mounds or strewn in ditches, AFP identified plastic waste from the UK, France, Italy and the Netherlands.
“European citizens need to know this: the last stop for their waste that they carefully separate into different boxes is not a recycling facility,” said Sedat Gundogdu, a professor at Cukurova University in Adana.
“It’s here where there are mountains of waste,” he told AFP in front of a mound of illegally dumped plastic.
While it is unclear just how much of the imported waste plastic meant to be recycled is ending up in illegal dumps, as long as recycling is expensive it remains a possibility.
As Western Europe pays for the waste to be taken away, there is a financial temptation for Turkish firms that import it to dump it rather than pay to recycle it.
Interpol warned in August about the rising involvement of criminal organisations in the global illegal plastic waste trade.
And activists have warned about the environmental problems caused by illegal dumping and burning of plastic waste.
‘Can’t easily be controlled’
Despite its green aspirations, the EU still recycles less than a third of its plastic waste, burning or burying the rest. It only recycles half that itself, sending the remainder abroad.
Turkey became Europe’s go-to destination for plastic waste after China began to close its doors to foreign waste from January 2018.
Monthly imports of plastic waste from Europe leapt by more than ten-fold from 2016 to 2019, according to Eurostat data, with Turkey taking in nearly a quarter of what the EU exported last year.
Britain led the way by far, accounting for over a quarter by itself.
In September, Turkey’s environment ministry instructed recycling companies to import no more than 50 percent of their needs and to source the other half domestically.
Meanwhile, Greenpeace Mediterranean has called for a total ban on plastic waste imports in Turkey and also pointed to the lack of inspections and transparency over the sector’s operations in Turkey.
Cukurova University professor Gundogdu agreed: “This isn’t a thing that can be easily controlled”.
Waste mountains or thread
But not all plastics imported from Europe end up being dumped along roadsides, as AFP saw in the province of Gaziantep, where an empty Sainsbury’s bottle of olive oil began its journey to become thread.
Plastic bottles imported from Europe and the United States are cleaned, ground into flakes and melted down to become fibre which is then transformed into thread for use in clothes.
GAMA Recycle exports 1,500 tonnes of it every month to 30 countries including Spain.
The company’s chairman Zafer Kaplan said some of the recycled thread is used by global brands such as H&M, Zara and Ikea as well as Turkish fashion retailers.
‘Good for the environment’
Although Kaplan acknowledged Turkey needs to improve its domestic waste collection system, he said “even if we collected all of our waste, this wouldn’t be enough to meet the recycling industry’s needs.”
Demand for the recycled products from European and Middle Eastern countries outstrips what Turkey could produce from domestic plastic waste, Kaplan said.
Moreover, it is taking “material that would not decompose for many years” if left in landfills and “makes it something that can be reused,” said Mehmet Dasdemir, who coordinates the research and development department at GAMA.
“And this is good for the environment.”
False idea about recycling
But Gundogdu said there is a false idea among the public that plastic is suitable for use as it is being recycled, when a drastic reduction in their use is needed.
Environmentalists now worry about a surge in the use of plastic because of the coronavirus pandemic as people don masks, gloves and other personal protective equipment usage.
Some of the illegally dumped waste ends up in rivers that empty into the Mediterranean Sea, with the plastic washing up on Turkish beaches, putting the tourism industry at risk.
“We come across single-use plastics the most in the seas,” said Greenpeace Mediterranean’s plastics project director Nihan Temiz Atas, who called for a ban on their use.
How countries are raising debt to fight COVID and . . . why developing nations face tougher choices by Shamel Azmeh, Lecturer in International Development, Global Development Institute, University of Manchester is about the pandemic that is affecting all countries as described by the World Bank’s article as a heat-seeking missile speeding toward the most vulnerable in society. That metaphor applies not just to the vulnerable in the rich world; the vulnerable in the rest of the world is not more immune.
How countries are raising debt to fight COVID and why developing nations face tougher choices
COVID continues to ravage societies around the world, and a key issue is how governments can afford to fight it. As economies are disrupted, governments are stepping in to increase their spending to bail out companies, pay the cost of health measures, and subsidise workers’ wages.
Before COVID, when people argued that the state should be able to offer free healthcare and free education, among other services, and welfare measures, a standard political response was that state resources were limited. Asked by a nurse in 2017 why her wages hadn’t increased from 2009 levels, then British prime minister, Theresa May, said: “There is no magic money tree that we can shake that suddenly provides for everything that people want.”
Except, a few years later, the government has not only been able to pay the wages of millions, it has also created rescue packages for thousands of firms and offered people vouchers to eat out in restaurants. A number of European countries have also taken the unprecedented step of underwriting the wages of millions of workers in response to the pandemic.
How is the British state and others capable of this radical increase in spending at a time when revenues from taxes are collapsing?
‘Magic money tree’
The answer to this lies in the debt market. Over the past few months, world governments have drastically increased their borrowing to cover the costs of the pandemic. It might appear logical that the cost of credit will go up during uncertain economic times. The reality, however, is that capital often goes to safer sovereign debt during economic downturns, particularly as the equity markets become unstable and volatile.
Over recent months, rather than struggling to find lenders or having to pay more for debt, the governments of the major economies have been awash with credit at historically low rates. In October, the EU, until now a small player in the debt market (as borrowing mostly is by national governments of member states), began a major borrowing campaign as part of the efforts to fight COVID through the SURE programme (Support to mitigate Unemployment Risks in an Emergency) which was created in May.
The first sale of bonds worth €17 billion was met with what some described as “outrageous demand”, with investors bidding a total of €233 billion to buy them. This intense competition was for bonds that offered a return of -0.26% over ten years, meaning that an investor who holds the bond to maturity will receive less than they paid today.
The EU is not the only borrower that is effectively being paid to borrow money. Many of the advanced economies have been in recent years and months selling debt at negative rates. For some countries, the shift has been dramatic. Even countries such as Spain, Italy and Greece that were previously seen as relatively risky borrowers, with Greece going through a major debt crisis, are now enjoying borrowing money at very low rates.
The reason for this phenomenon is that while these bonds are initially bought by “traditional” market actors, central banks are buying huge quantities of these bonds once they are circulated in the market. For a few years now, the European Central Bank (ECB) has been an active buyer of European government bonds – not directly from governments but from the secondary market (from investors who bought these bonds earlier). This ECB asset purchase programme was expanded to help weather the COVID crisis, with the ECB spending €676 billion on government bonds from the start of 2020 until September.
Other central banks in the major advanced economies are following the same strategy. Through these programmes, those central banks encourage investors to keep buying government bonds with the knowledge that the demand for those bonds in the secondary market will remain strong.
Not everybody, however, enjoys a similar position in the debt market. While the rich economies are being chased by investors to take their money, the situation is radically different for poorer countries. Many poor countries have limited access to the credit market and rely instead on public lenders, such as the World Bank.
In recent years, this pattern began to change with a growing number of developing countries increasing their foreign borrowing from private lenders. Developing countries, however, are in a structurally weaker position than richer peers. The smaller scale of their capital markets mean that they are more reliant on external financing. This reliance means that developing countries rely on raising money in foreign currency, which increases the risk to their economies.
As many developing countries have less diversified exports with a higher percentage of commodities, the price decline in commodities in recent months has increased those risks. As a result, developing countries face a significantly higher cost of borrowing compared to the richer economies.
A few large developing countries, such as Indonesia, Colombia, India and the Philippines, have begun to follow the policy adopted by the advanced economies of buying government bonds to fund an expanding deficit. The risks of doing this, however, are higher than the richer economies, including a decline in capital inflows, capital flight and currency crises. A report by the rating agency S&P Global Ratings illustrated the differences between those two economies:
Advanced countries typically have deep domestic capital markets, strong public institutions (including independent central banks), low and stable inflation, and transparency and predictability in economic policies. These attributes allow their central banks to maintain large government bond holdings without losing investor confidence, creating fear of higher inflation, or triggering capital outflow. Conversely, sovereigns with less credible public institutions and less monetary, exchange rate and fiscal flexibility have less capacity to monetise fiscal deficits without running the risk of higher inflation. This may trigger large capital outflows, devaluing the currency and prompting domestic interest rates to rise, as seen in Argentina over parts of the past decade.
While the reaction of the market to this approach by developing countries has been muted so far, the report argued, this situation might change. Developing countries who do this could “weaken monetary flexibility and economic stability, which could increase the likelihood of sovereign rating downgrades”.
In July, following the participation of Ethiopia, Pakistan, Cameroon, Senegal and the Ivory Coast in a World Bank-endorsed G20 debt suspension initiative, the rating agency Moody’s took action against those countries arguing that participation in this scheme increased the risk for investors in bonds issued by these countries, leading to some developing economies avoiding the initiative in order not to send a “negative signal to the market”. Zambia is on the verge of being the first “COVID default” and other developing countries could face a similar situation in coming months.
As a result of these dynamics, many developing countries are facing the tough choice of giving up any economically costly health measures or facing serious fiscal and economic crises. Access to credit has become a defining factor in the ability of governments to respond to the pandemic. As a result of access to cheap credit, developed economies are so far able to take such health measures while limiting the social and economic impact of the pandemic. Many developing countries do not have this luxury. Not everyone gets to shake the branches of the magical money tree.
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