High interest rates are leading to state capture

IN restraining the making of needed development expenditure, austerity allows further perpetuation of elite capture, since lack of development expenditure/investment into sectors, for instance, like health, education, transportation, and employment/economic opportunities does not empower the masses.

This, in turn, keeps the influence of ordinary citizens over public policy weak, while the elites enjoy a greater say in public policy, further perpetuating their grip.

We do not need austerity but better policies. In  the United States, it strongly appears the Federal Reserve has adopted an overboard monetary tightening policy, given a significant global aggregate supply shock determinacy of inflation, made all the more worse by the war in Ukraine.

In a recent interview to Democracy Now, Nobel Economics laureate Joseph E. Stiglitz pointed out in this regard “…as we look at international economic crisis, soaring inflation, devalued currencies, nations across the globe confronting catastrophic debt crisis…” He pointed out in this regard: “What concerns me right now, is that all of this is being made worse by monetary policies. The Federal Reserve raising interest rates when the problem is not excess aggregate demand.”

The same applies to Zimbabwe. Overboard policy tightening has rendered the lives of the majority very difficult. The high interest rate is killing the middle class or what remains of it. The problem is weak institutions and supply-side interruptions, demand shifts caused by the very forces the authorities always describe–the war, the Covid-19 pandemic. Let me be frank, keeping interest rates high is designed to slow the economy down, increase unemployment and is not the right policy for addressing the inflation that we face.

Raising interest rates more than needed accentuates inflation in light of imported inflation as well, at the back of lack of investment, likely leading to lower supply; in addition to causing capital flight, along with enhancing the difficult debt situation.

Economist Isabella M. Weber, in a recent interview, pointed towards the need for less reliance on the policy of monetary tightening, and more innovative policies at the fiscal side, given the underlying significant role of global aggregate supply shock in raising and keeping inflation at a high level.

She pointed out in her recent interview to “60 Minutes Australia” as follows: “I think it is a very painful way of fighting inflation, and I think there are alternatives. It’s a way of fighting inflation that often makes the people, who have suffered from inflation, suffer once more. The idea of using interest rate to tackle inflation is a very roundabout way of going about it. It’s a bit like as if you had a fire in your kitchen, and you were going to flood your whole house. So, therefore, I think given the nature of inflation that we have been observing, it will be better to choose more targeted measures, rather than to simply rely on interest rate hikes. …Due to the enormous pain that is being induced by interest rate hikes, I think governments should step up, and should be creative, and try to devise surgical tools to deal with the kind of inflation that we are facing today.”

Zimbabwe, for instance, has seen sharp and significant increase in the policy rate over the last one-and-a-half year or so, indicating likely over-reliance on monetary tightening to control inflation, when there is clearly a strong supply-side role of determination of inflation, in addition to capital flight also contributing to the imported inflation channel.

Moreover, rather than providing developing countries with debt moratorium/relief, and meaningful allocation of special drawing rights (SDRs), they are being asked to practice austerity, that is reducing aggregate demand and investment levels in the economy; once again not allowing greater fiscal space for enhancing supply, and reducing cost-push inflation, not to mention moving towards greener, resilient, and more inclusive economies. Here, it needs to be clarified that austerity, as elaborated above in light of economic literature, is different from reducing inefficient expenditure, belt-tightening with regard to running of government, and expenditure rationalisation.

In restraining the making of needed development expenditure, austerity allows further perpetuation of elite capture, since lack of development expenditure/investment into sectors, for instance, like health, education, transportation, and employment/economic opportunities does not empower the masses, in turn, keeping their influence over public policy weak, while that of elites with greater say in public policy, further perpetuating their grip.

In her book The Capital Order: How Economists Invented Austerity and Paved the Way to Fascism” published in 2022, economist Clara E. Mattei highlighted the dangers of austerity in terms of strengthening elite capture as follows: “If one subscribes to the argument that austerity is a tool for managing a capitalist economy, as Keynesian economists did and do, then one might believe that a continued deployment of austerity across societies and economies is a form of political irrationality– a wrong economic policy based on wrong economic theory that has never succeeded in achieving its stated ends. …Against its promise to stabilize the world economy, the austerity project of the 1920s was a spectacular failure: its reduction of aggregate demand… is cited by many as a cause of the Great Depression… austerity’s capacity to impose and reinforce class structure is the true measure of its efficacy; it was a servant to, and indeed the primary safeguard of, capital order.”

About the writer: Tinashe Kaduwo is a researcher and economist. Contact: [email protected], WhatsApp +263773376128