Is ‘flexible inflation targeting’ (FIT) ripe for a coup d’état that topples its almost three-decade grip on the ruling dispensations of central banks the world over? Pioneered by New Zealand as early as 1990, and soon emulated by Canada and the United Kingdom, FIT is now the de jure, or de facto, monetary policy of most major advanced and emerging market central banks, including the Reserve Bank of India (RBI).
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Doubts about whether FIT was fit for the purpose began to grow after the global financial crisis of 2007-2009 and its aftermath. A monetary policy fixated solely on consumer price inflation (CPI), or some variant, failed to react to asset price bubbles that eventually burst and threatened to topple the entire global monetary and financial edifice.
As it happens, FIT largely survived that initial barrage. This was partly because, despite its limitations, no other monetary policy framework that might be a credible replacement was proposed by FIT’s legion of critics. It was a bit like disliking the government one had, but liking the alternative options even less. Plus, inflation stayed tame in the aftermath of that crisis, and attention was focused on unconventional policies such as ‘quantitative easing’ to pump liquidity into financial markets. This pushed debates on FIT largely onto the back burner.
There was also a sense that regulatory policies—so-called ‘macroprudential’ policies—would be better suited to the cause of keeping asset price bubbles in control, while the policy interest rate should remain focused on CPI, or another nominal anchor such as nominal gross domestic product.
Ironically, economic dislocations caused by the covid pandemic may end up having a more profound impact on the consensus around monetary policy alternatives to FIT than a financial crisis linked directly to monetary policy a little more than a decade earlier. Again, in the initial aftermath of this crisis, with a collapse in aggregate economic activity in all major economies, there was little fear of an uptick in inflation. Central banks across the world doubled down on unconventional policies, and governments began to roll out massive doses of fiscal stimulus in most advanced and emerging economies.
But, now that the world is on track toward vaccination, lockdowns are easing and green shoots of an economic recovery are becoming visible, alarm bells are starting to ring, at least dimly and distantly for now. In the United States, the stimulus proposal by President Joe Biden, which has a jaw-dropping price tag of $1.9 trillion, has caused even centre-left, Keynesian-oriented economists to take note and urge caution. Leading this charge is Lawrence Summers, a Harvard economics professor, former treasury secretary under president Bill Clinton and a key economic policy advisor to former president Barack Obama.
Meanwhile, Olivier Blanchard, a former chief economist of the International Monetary Fund, argues—as quoted in The Wall Street Journal—that the Biden stimulus is so large that it would represent “an increase in demand that I have not seen in my lifetime”; there is a danger that unemployment may be driven down to 1.5%, well below the ‘natural’ rate at which inflation would stay stable, and the stimulus is thus, in Blanchard’s view, potentially very inflationary. For his part, Summers calls the Biden stimulus an entry into “entirely unprecedented territory”.
As it happens, fears of a return of inflation make the case for sticking with FIT more compelling. After all, the policy was designed to bring an end to the almost two decades of erratic monetary policy, which followed the collapse of the Bretton Woods system in 1971, when America’s then president Richard Nixon closed the “gold window”, effectively killing the system of fixed exchange rates that had given the world much-needed monetary stability since its creation after World War II. The ‘stagflation’ fiasco of the 1970s—an era of economic recession and high inflation—and the failed experiment with monetary targeting in many advanced economies in the 1980s, which resulted in erratic inflation outcomes, propelled both academic economists and central bankers towards FIT in the 1990s.
In an important shift, the US Federal Reserve recently modified its inflation target to focus on average inflation. This means that periods of inflation below target could be compensated for with a phase of inflation above target, so that inflation hits an average target over a given span of time. This would eliminate the asymmetry caused by the fact that—once FIT was adopted and the public’s inflationary expectations got baked in around the Fed’s target—inflation has more often than not undershot rather than overshot its aim in the US.
Still, not all central bankers are equally sanguine. In an important recent speech, Andy Haldane, Bank of England’s chief economist, has warned that taming inflation, if it flares up again, may be akin to trying to catch a “tiger by the tail”, borrowing an expression coined by libertarian economist, Friedrich von Hayek, who was always hawkish on inflation and sceptical of the government’s ability to fine-tune business cycles (and the wisdom of trying to do this).
At this juncture, it would be salutary to remind ourselves that the stagflation crisis of the 1970s occurred partly because of complacency over inflation heating up. FIT may not be ideal, but it is still the best among our current choices (many of which are significantly worse) of a monetary policy framework.
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- Lowering Emissions by Accelerating Forest Finance (LEAF) Coalition, a collective of the United States, United Kingdom and Norway governments, came up with a $1 billion fund.
- LEAF is supported by transnational corporations (TNCs) like Unilever plc, Amazon.com, Inc, Nestle, Airbnb, Inc as well as Emergent, a US-based non-profit.
- The world lost more than 10 million hectares of primary tropical forest cover last year, an area roughly the size of Switzerland.
- Ending tropical and subtropical forest loss by 2030 is a crucial part of meeting global climate, biodiversity and sustainable development goals. Protecting tropical forests offers one of the biggest opportunities for climate action in the coming decade.
- Tropical forests are massive carbon sinks and by investing in their protection, public and private players are likely to stock up on their carbon credits.
- The LEAF coalition initiative is a step towards concretising the aims and objectives of the Reducing Emissions from Deforestation and Forest Degradation (REDD+) mechanism.
- REDD+ was created by the United Nations Framework Convention on Climate Change (UNFCCC). It monetised the value of carbon locked up in the tropical forests of most developing countries, thereby propelling these countries to help mitigate climate change.
- It is a unique initiative as it seeks to help developing countries in battling the double-edged sword of development versus ecological commitment.
- The initiative comes at a crucial time. The tropics have lost close to 12.2 million hectares (mha) of tree cover last year according to global estimates released by Global Forest Watch.
- Of this, a loss of 4.2 mha occurred within humid tropical primary forests alone. It should come as no surprise that most of these lost forests were located in the developing countries of Latin America, Africa and South Asia.
- Brazil has fared dismally on the parameter of ‘annual primary forest loss’ among all countries. It has lost 1.7 mha of primary forests that are rich storehouse of carbon. India’s estimated loss in 2020 stands at 20.8 kilo hectares.
- Between 2002-2020, Brazil’s total area of humid primary forest reduced by 7.7 per cent while India’s reduced by 3.4 per cent.
- Although the loss in India is not as drastic as in Brazil, its position is nevertheless precarious. For India, this loss is equivalent to 951 metric tonnes worth carbon dioxide emissions released in the atmosphere.
- It is important to draw comparisons between Brazil and India as both countries have adopted a rather lackadaisical attitude towards deforestation-induced climate change. The Brazilian government hardly did anything to control the massive fires that gutted the Amazon rainforest in 2019.
- It is mostly around May that forest fires peak in India. However, this year India, witnessed massive forest fires in early March in states like Odisha, Uttarakhand, Madhya Pradesh and Mizoram among others.
- The European Union’s Copernicus Atmospheric Monitoring Service claimed that 0.2 metric tonnes of carbon was emitted in the Uttarakhand forest fires.
- Implementation of the LEAF Coalition plan will help pump in fresh rigour among developing countries like India, that are reluctant to recognise the contributions of their forest dwelling populations in mitigating climate change.
- With the deadline for proposal submission fast approaching, India needs to act swiftly on a revised strategy.
- Although India has pledged to carry out its REDD+ commitments, it is impossible to do so without seeking knowledge from its forest dwelling population.
Context:-
At the recently concluded Leaders’ Summit on Climate in April 2021, Lowering Emissions by Accelerating Forest Finance (LEAF) Coalition, a collective of the United States, United Kingdom and Norway governments, came up with a $1 billion fund plan that shall be offered to countries committed to arrest the decline of their tropical forests by 2030.
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Why LEAF Coalition?
Brazil & India
According to the UN-REDD programme, after the energy sector, deforestation accounts for massive carbon emissions — close to 11 per cent — in the atmosphere. Rapid urbanisation and commercialisation of forest produce are the main causes behind rampant deforestation across tropical forests.
Tribes, Forests and Government
Disregarding climate change as a valid excuse for the fires, Indian government officials were quick to lay the blame for deforestation on activities of forest dwellers and even labelled them “mischievous elements” and “unwanted elements”.
Policy makers around the world have emphasised the role of indigenous tribes and local communities in checking deforestation. These communities depend on forests for their survival as well as livelihood. Hence, they understand the need to protect forests. However, by posing legitimate environmental concerns as obstacles to real development, governments of developing countries swiftly avoid protection of forests and rights of forest dwellers.
For instance, the Government of India has not been forthcoming in recognising the socio-economic, civil, political or even cultural rights of forest dwellers. According to data from the Union Ministry of Tribal Affairs in December, 2020 over 55 per cent of this population has still not been granted either individual or community ownership of their lands.
To make matters worse, the government has undertaken systematic and sustained measures to render the landmark Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act, 2006 ineffective in its implementation. The Act had sought to legitimise claims of forest dwellers on occupied forest land.
Various government decisions have seriously undermined the position of indigenous people within India. These include proposing amendments to the obsolete Indian Forest Act, 1927 that give forest officials the power to take away forest dwellers’ rights and to even use firearms with impunity.
There is also the Supreme Court’s order of February, 2019 directing state governments to evict illegal encroachers of forest land or millions of forest dwellers inhabiting forests since generations as a measure to conserve wildlife. Finally, there is the lack of data on novel coronavirus disease (COVID-19) deaths among the forest dwelling population;
Tardy administration, insufficient supervision, apathetic attitude and a lack of political intent defeat the cause of forest dwelling populations in India, thereby directly affecting efforts at arresting deforestation.
Way Forward
Tuntiak Katan, a global indigenous leader from Ecuador and general coordinator of the Global Alliance of Territorial Communities, aptly indicated the next steps at the Climate Summit:
“The first step is recognition of land rights. The second step is the recognition of the contributions of local communities and indigenous communities, meaning the contributions of indigenous peoples.We also need recognition of traditional knowledge practices in order to fight climate change”
Perhaps India can begin by taking the first step.