Opinion: The cost of privatizing aid

While many low- and middle-income countries remain in the early stages of the COVID-19 pandemic, the economic shockwaves of this rare and unexpected disaster have already had a devastating impact. Capital outflows from emerging economies are at nearly five times the levels of the 2007-2008 financial crisis. Declining commodity exports, lost remittances, and a near halt in tourism have caused immeasurable damage, as economic contraction threatens to increase the portion of the world’s population living in poverty from around 15% to up to 21% in the most extreme scenario.

But even as higher-income countries are ramping up social relief spending to manage the worst effects of the crisis on their citizens, Washington-based institutions are advising poor countries to follow more conventional measures.

In recent weeks, the World Bank has rolled out relief programs that prioritize market-driven solutions and fiscal objectives in low-income countries — measures that will limit the universal access of their populations to social protections and leave the world’s most vulnerable people to bear the brunt of the coming shocks.

The World Bank’s COVID-19 response strategy was announced during a G-20 finance ministers’ call in late March, when the bank’s president, David Malpass, made the following remarks: “Countries will need to implement structural reforms to help shorten the time to recovery and create confidence that the recovery can be strong. For those countries that have excessive regulations, subsidies, licensing regimes, trade protection, or litigiousness as obstacles, we will work with them to foster markets, choice and faster growth prospects during the recovery.”

By linking emergency relief with the goals and targets of structural reform, Malpass’ comments indicate that his institution is seizing on the opportunity to reinscribe old orthodoxies in the recovery strategies of the world’s lowest-income countries.

The World Bank’s position echoes that of the International Monetary Fund, whose principle response to crisis-stricken countries applying for support from a relief fund designed to assist with pandemics has been to offer these countries conventional loans. IMF loans are conditional on lending reforms that include such policy measures as budget cuts, privatization, weakening worker’s protections, and cuts to public services, including health and social care.

The World Bank’s crisis policymaking exposes an enduring problem: The extent to which the discredited policies of excessive privatization, liberalization, and market dominance continue to influence how development problems are framed, and to shape the solutions that follow.

Despite ample evidence that decades of pursuing fiscal objectives and restructuring have failed to translate into well-being for all citizens, the World Bank’s response strategy rests on limiting state intervention while increasing the ability of firms to trade, invest, and move capital.

Over half of the World Bank’s $14 billion COVID-19 response package will be channelled through the International Finance Corporation, the bank’s private sector financing arm, in fast acting financial support for private companies. Access to this support is conditioned on structural reforms, whereby governments roll back social spending programs, cutbacks that normally target health, education, labor markets, pensions, and other programs.

A remaining $6 billion of the COVID-19 response package is earmarked to support health care, funds that, according to The Lancet, will likely be used to finance private health services in fulfilment of World Bank conditionality, which mandates deregulation and privatization.

The Lancet warns that promoting private markets in health care could have adverse consequences on health outcomes, taking much needed staff from public health services, while draining money from public health systems by saddling countries with additional loan repayments.

Once again, the diversion of resources away from public services as a result of pressure to pay off debts will ultimately detract from government efforts to address the multiple overlapping crises triggered by COVID-19.

Elsewhere in the world, there is a growing recognition that the implications of rolling back public services largely outweigh the benefits, and that the current austerity agenda is untenable, particularly in times of crisis.

In recent weeks, Western governments have announced unprecedented stimulus programs aimed at buttressing safety nets, protecting industries, and keeping households solvent, recognizing that in order to keep their economies afloat they must ensure the well-being of their citizens.

Such unorthodox policy responses, onlookers speculate, suggest that the tide is turning on a policy model launched during the ‘80s and ‘90s that aimed to reconstruct states to comply with an essentially economistic view of social life.

As the global pendulum swings toward sustainable economies, the push for fiscal austerity in LMICs is not only out of sync with the times, but will hinder government efforts to adequately protect stricken populations.

As a result, the world’s poor will bear the brunt of the pandemic and its consequences, including poverty, inequality, and unemployment, with the possible increase in the global poverty count estimated at over 500 million people largely within the regions of South Asia and sub-Saharan Africa.

Mitigating the pandemic’s most damaging consequences will critically depend on economic policy action taken. Though preventing a longer depression is important, responding to the urgent issue at hand should not prioritize private sector activity and growth at the expense of broad social programs, especially given that the pandemic is primarily a health problem that will disproportionately affect the poor.

Vitally, a greater share of support funding should be directed toward emergency relief for health services to support public health responses to the pandemic and to expanding social protections, particularly to vulnerable populations that fall outside of World Bank “workfare” job retention schemes.

Beyond emergency interventions, international partners can assist by making credible commitments to support the resilience of economies with the highest concentration of low-income populations, and reorienting their policies toward bolstering, rather than limiting the capacity of national governments to respond to the needs of their citizens.

Critically, removing conditionality and supporting the reorganization of governments’ financing costs would assist them in boosting health care spending, establishing economic safety nets and launching public investment programs to incentivize production.

Already the pandemic appears to be solidifying trends toward greater government involvement in the economy, including expanding states’ ability to regulate international investments in line with public interest, government regulation to ensure the accessibility of private sector goods to the poor and vulnerable, and restrictive admission policies on foreign direct investment in strategic industries.

Supporting government-led processes to protect livelihoods and enhance equity in development was necessary before the pandemic, but has become more so during the crisis and beyond.