Wednesday, April 17, 2013

Economy: A Global New Deal Can End Menacing Austerity

By R. Nastranis | IDN-InDepth NewsAnalysis

BERLIN (IDN) - Economic austerity is spreading its tentacles to rich and poor countries around the world threatening to impact 5.8 billion citizens this year, and 6.3 billion or 90 percent of global population by 2015, warns a new report and calls for a Global New Deal to stave off the menacing situation.

A Global New Deal involves public investments to boost employment, catalyse sustainable development, improve living standards, reduce inequalities and promote political stability, says the report, titled ‘The Age of Austerity – A Review of Public Expenditures and Adjustment Measures in 181 Countries’.

The 60-page paper has been published by the Initiative for Policy Dialogue (IPD) at the Columbia University, USA, and the South Centre in Geneva, Switzerland. Its co-authors are: Isabel Ortiz, Director of the Global Social Justice Program at IPD; and Matthew Cummins, an economist who has worked at the UN Development Programme (UNDP), UN Children’s Fund (UNICEF) and the World Bank.

The authors expect the scope of public expenditure consolidation to intensify significantly in 2013, impacting 119 countries in terms of GDP (gross domestic product), and then steadily increase to reach 132 countries in 2015. The latest IMF projections suggest that this trend will continue at least through 2016.

The paper gives four outstanding examples of countries that are trying to put an end to an “age of austerity”. These, it says, could be emulated by other countries.


Ortiz and Cummins quote from IMF Article IV Consultation (2012:25-27) in which Thailand’s government argued: “Alleviating income inequality is at the heart of the government’s policy. The authorities emphasized their objective of income redistribution through measures such as increases in the minimum wage and support for the rice price aiming at boosting income among poorer segments of the population…/…The government argued that increases in the minimum wage and a higher rice price can start a virtuous growth cycle and boost domestic demand and growth as well as reduce social inequalities.”


The paper explains how Iceland repudiated private debt to foreign banks and did not bail-out its financial sector, pushing losses on to bondholders instead of taxpayers. The government also imposed temporary capital controls to shield itself from capital outflows and focused on supporting households and businesses in a difficult fiscal context.

It quotes from Iceland’s IMF Article IV Consultation (2012:5-6): “A key post crisis objective of the Icelandic authorities was to preserve the social welfare system in the face of the fiscal consolidation needed. Wage increases, agreed among the social partners in May 2011, led to a rise in nominal wages of 6% and the unemployment rate fell to about 7% in 2012…/…In designing fiscal adjustment, the authorities introduced a more progressive income tax and created fiscal space to preserve social benefits.

“Consequently, when expenditure compression began in 2010, social protection spending continued to rise as a percent of GDP, and the number of households receiving income support from the public sector increased. These policies, led to a sharp reduction in inequality. Iceland’s gini coefficient—which had risen during the boom years—fell in 2010 to levels consistent with its Nordic peers.”


Ecuador, a country challenged like Europe by not having a national currency (it uses the US$) and therefore has limited capacity for policy manoeuvre, creatively managed to restore growth and improve living conditions, IPD and South Centre paper says. The government kept interest rates low and expanded liquidity by requiring banks to keep at least 45% of their reserves in Ecuador.

On the other hand, adds the paper, Ecuador took a partial default on its illegitimate external debt (private debt that had been made public); the freed public resources were invested in human development, which included doubling education spending between 2006-2009, nearly doubling housing assistance programs to low-income families and expanding its main social protection program, the cash transfer Bono de Desarrollo Humano. “The results are impressive: poverty fell from a recession peak of 36.0% to 28.6%, unemployment dropped from 9.1% to 4.9% and school enrolment rates rose significantly (Ray and Kozameh 2012).”


Quoting from IMF Article IV Consultation 2012:7-30, the paper says: China is “transforming the economic growth model to be more reliant on consumer demand. Such a transformation would substantially boost living standards and make growth more balanced, inclusive, and sustainable. Recent progress includes increased social safety net payments… higher natural resource taxation…/…there is space to accelerate the social housing program…/…The government is aiming for comprehensive coverage of the pension system by 2020… and intends to provide safe, affordable and effective health care to all citizens by 2020”.

Policy shift

The paper also takes note of an inspiring fact that the crisis has already triggered a policy shift in some regions. Policymakers in Asia, for example, are increasingly moving away from unsustainable export-led growth models toward more inclusive employment-intensive recovery strategies that are cantered on building internal markets and improving social protection systems.

Latin America, another region much affected by financial crises in the 1990s, has pursued regional integration to expand internal markets and invested significantly in social protection systems to improve living standards; indeed, much of the region’s relative resilience to the contagion effects of the current crisis is due to these recent policy stances, avers the paper

Besides, in 2012, some countries concerned with low growth and demand for their exports announced a new round of fiscal stimulus. While the amounts are small for sustained recovery – compare the US$0.38 trillion in 2012 to the US$2.4 trillion of fiscal stimuli in 2008 – they are a sign of policy change, Ortiz and Cummins explain.

The co-authors of the paper examine the latest IMF government spending projections for 181 countries by comparing the four distinct periods of 2005-2007 ahead of the financial crisis, 2008-2009 in phase one of the crisis characterised by fiscal expansion, 2010-2012 in phase two of the crisis that marked the onset of fiscal contraction, and 2013-2015 in phase three of the crisis signifying intensification of fiscal contraction.

They review 314 IMF country reports in 174 countries to identify the main adjustment measures considered in high-income and developing countries, discuss the threats of austerity to development goals and social progress, and call for urgent action by governments to adopt alternative and equitable policies for socio-economic recovery.

As Ortiz points out in a summary of the report, in a first phase of the global economic crisis (2008-2009), most governments introduced fiscal stimulus programs and ramped up public spending, as the world was able to coordinate policies.

However, premature expenditure contraction became widespread in 2010, which marked the beginning of the second phase of the crisis, despite vulnerable populations’ urgent and significant need of public assistance.

One of the key findings of the IPD-South Centre analysis is that fiscal contraction is most severe in the developing world. Overall, 68 developing countries are projected to cut public spending by 3.7% of GDP, on average, in the third phase of the crisis (2013-15) compared to 26 high-income countries, which are expected to contract by 2.2% of GDP, on average. Moreover, comparing the 2013-2015 and 2005-2007 periods suggest that a quarter of countries are undergoing excessive contraction, defined as cutting expenditures below pre-crisis levels.

The report refers to a desk review of IMF country reports published between January 2010 and February 2013. It indicates that governments are weighing various adjustment strategies. These include elimination or reduction of subsidies, including on fuel, agriculture and food products in 100 countries; wage bill cuts/caps, including the salaries of education, health and other public sector workers in 98 countries; and rationalizing and further targeting safety nets in 80 countries.

Other impending austerity measures include pension reform in 86 countries; healthcare reform in 37 countries; and labour flexibilization in 32 countries. Many governments are also considering revenue-side measures that can adversely impact vulnerable populations, mainly through introducing or broadening consumption taxes, such as value added taxes (VATs), on basic products that are disproportionately consumed by poor households in 94 countries.

The salient aspects of the paper are concomitant with the view of the United Nations, which has repeatedly warned that austerity is likely to bring the global economy into further recession and increase inequality. In doing so, it has called on governments for forceful and concerted policy action at the global level to make fiscal policy more countercyclical, more equitable and supportive of job creation; to tackle financial market instability and accelerate regulatory reforms; and to support development goals. [IDN-InDepthNews – April 17, 2013]

Photo: Workers protest to get EU leaders to end austerity | Credit: