Info Service on Finance and Development (May13/01)
Dear friends and colleagues,
To highlight some of the complex dynamics and challenges of the IMF’s role in the Arab region, in a context of continuing popular uprisings that are calling for social and economic justice and for transforming the national development paradigm, and to link it to the waves of austerity across Europe, the US and other regions, a panel discussion titled “From the Arab Revolutions to Global Austerity,” was held on the sidelines of the spring meetings (19-21 April) of the IMF and World Bank.
The event held on 20 April was organized by Third World Network and Arab NGO Network for Development, in cooperation with Cairo-based Egyptian Center for Economic and Social Right and Initiative for Policy Dialogue at Columbia University in New York.
We are pleased to share with you a report of the panel discussion in two parts. In Part I below we report the presentations of Manuel Montes from South Centre (Geneva) and Isabel Ortiz from Initiative for Policy Dialogue.
Part II will report on the presentations of Mahinour El Badrawi from Egyptian Centre for Economic and Social Rights (Cairo) and KindaMohamadieh from Arab NGO Network for Development (Beirut).
From the Arab revolutions to global austerity
the peoples’ uprising fall on deaf ears in the current wave of austerity?
Washington, D.C., 2 May (Bhumika Muchhala and Kinda Mohamadieh) – The post-revolution Arab region has been high on the recent agenda of the International Monetary Fund (IMF).
Besides its annual Article IV, or macroeconomic assessment reports, which prescribes national policy blueprints, the IMF has been engaged in the region in a variety of ways. Morocco and Jordan have two-year loan packages, Yemen has an emergency credit line and Tunisia just recently signed on to a precautionary financing arrangement. Meanwhile, Egypt is in the throes of contentious negotiations with the IMF country mission team on its loan programme.
programmes are designed with detailed policy conditionality on various
fronts, including fiscal policy, with a region-specific focus on fuel
subsidies, monetary and exchange rate policy, and structural policy
related to domestic labour markets. Trade liberalisation, privatisation,
public-private partnerships, financial and banking policies are also
part of the loan packages. The IMF’s role in the region is only
amplified by its historical links to bilateral donor and capital market
event held on 20 April was organized by Third World Network and Arab
NGO Network for Development, in cooperation with Cairo-based Egyptian
Center for Economic and Social Right and Initiative for Policy Dialogue
at Columbia University in New York. The IMF-World Bank meetings
are held twice a year in Washington, D.C., and involve the chief finance
ministry and central bank officials from the member states of those
Bretton Woods Institutions.
To open the session, Bhumika Muchhala said that there is a problematic paradox between the endeavors of the international development community to formulate a Post-2015 global development agenda and the global consensus on austerity, particularly in the form of public spending cuts and regressive tax policies. Both sides of the Mediterranean are facing similar macroeconomic stability programmes that prioritize deflationary macroeconomic policies over expansionary ones that could stimulate public investment, create urgently needed jobs and re-orient tax policies toward wealth redistribution for greater socio-economic equality.
The Arab region is already facing a troubling degree of macroeoconomic instability in public and private debt, fiscal imbalances and foreign reserves. Fiscal consolidation can carry many risks, such as exacerbating youth unemployment, reinforcing economic inequalities and various social discriminations and deepening economic and financial dependency on external donors and creditors. This would, in tragic irony, lead to a re-creation of the same unjust and failed economic model that led to the peoples uprisings over the last several years. The peoples’ revolution in the Arab region was not merely a reaction to corrupt dictatorships, but also the outcome of unjust and failed economic and social models. In this sense, the aspirations and demands of the people are directly connected to international financial and trade regimes, in that systemic policy-setting and rules shape national and local realities.
Austerity goes against the very grain of development strategy, said Muchhala. A development strategy involves a pro-active and developmental state that builds a social contract with citizens and possesses the policy space and political will to implement transformation processes that are structural, institutional and normative.
This includes, for example, directing public expenditure and investment toward building strong social sectors, particularly in health, education and social protection; creating decent work through strategic sectoral investments, boosting wages and strengthening productive capacity; and, ensuring food security and economic self-resilience against volatile global commodity prices.
Manuel Montes, Senior Financial Advisor in the South Centre, said that Arab countries confront both political transition and economic recovery, and it is not clear if one will support the other or whether the nature of the economic recovery would facilitate or hinder political transition, or even if economic recovery will be consistent with a change in growth dynamics that will avoid a repeat of the economic crisis.
These processes of transitions, according to Montes, involve the geopolitical and commercial interests of external donors, with international financial institutions serving as the technocratic policy channel for donor interests, along with the old and newly-emerging domestic forces.
A similar intervention by international financial institutions was witnessed in the Philippines’ transition during the 1986 overthrow of Ferdinand Marcos, which took place in the midst of the 1982 debt crisis (which swept through Latin America and many African countries). Montes explained that the World Bank (WB) and the IMF economic conditions prioritise “paying back every penny” according to contractual terms to the international private sector and the servicing of public debt inherited from the previous government.
Having been intimately connected with overthrown dictatorship in the national context of the Philippines, the IMF and WB staff made strenuous efforts to rehabilitate the reputations of their agencies, which began to be seen as playing a dual role of both upholding corrupt authoritarian or strongman regimes and then attempting to aid a ‘democratic transition’ after their overthrow.
Montes said that some of the major Arab countries today face severe balance of payment crises, including Morocco, Tunisia, Egypt, and Jordan. These countries have been facing current account deficits during the last three years along with elevated debt levels, and austerity is being proposed as the way towards stabilizing the macroeconomic situation in the region.
Montes explained that the IMF programs are based on what he called a “backward calculation”, whereby the focus is placed on the financing gap of the coming 12 to 24 months, with the most important claim on resources being the amount of debt servicing that can be extracted from public revenues and domestic private savings, with an emphasis of maintaining the Fund’s own parameters of ‘debt sustainability.’ (See Polak (1997) “The IMF Monetary Model: A Hardy Perennial” Finance and Development, December, pp. 16-19 available at http://www.imf.org/external/pubs/ft/fandd/1997/12/pdf/polak.pdf )
The important implicit assumption is that a restructuring of external debt – inherited from the previous regime - is not on the table as an option. Thus, the level of domestic growth that can be afforded is discussed within the context of the previous two considerations. Within this approach, economic recovery and the absorption of unemployed capital and labor become the residual result after debt servicing is prioritised.
Montes highlights that the problem with the word austerity is that it implies that everyone’s spending is cut. However, the way austerity often plays out in reality is that households, factories and their workers (e.g. the real economy), and the public sector face spending cuts while creditors, donors and the financial sector receive payments owed to them at market interest rates as contractually due. Unlike in developed countries where perhaps austerity has some element of social psychology to try to motivate a well-developed private sector to begin taking risks and making investments again, in developing countries austerity is not done for its own sake–it is done to set aside resources to ensure repayment of debt owed, Montes added.
Thus, the IMF’s financial loans to a country often stands for helping the country to meet its external debt service obligations, Montes explained. It also means that it is not the country that is being rescued, it is rather the creditors and institutions who have outstanding debt owed to them. In the meantime, under these programs with the IMF, the government must undertake austerity-driven policy reforms whose long-term impact on investment and growth has proven to be highly doubtful in previous experiences.
For example, measures, such as removing fuel subsidies should be a medium-term and long-term undertaking done with proper deliberation. Only if resources saved from the immediate elimination of such subsidies are guaranteed to be applied to employment and job creation, and not debt servicing, can the removal of fuel subsidies be a legitimate part of an emergency strategy.
IMF interventions are associated with recommendations for ambiguous but large-scale terms such as “enabling environment,” which often translate into blanket investor protections and straitjackets on capital controls that unduly restrict growth oriented domestic policies. Such policies tend only to elicit short-term, speculative investments from abroad. It does not create the platform for long-term and sustained public investment that creates jobs and spurs new economic activities. The impact of policy restrictions in favour of “enabling environments” could also mean loss of control over domestic interest rates,lending rates for long-term investment, and the exchange rate, which amplifies risk and obstructs long-term investment.
Yet, Montes said that countries have multiple alternatives to consider. Countries could “calculate forward” instead of backwards, by identifying how much of the factories and workers are idle, the rate of macroeconomic growth that would be required to re-absorb unemployed resources, and the investment rate that will absorb new entrants into labor force and improve the competitiveness of the economy over the medium-term.
Countries can also consider monetary easing, in the same way that advanced economies are doing, Montes highlighted. However, this will require imposing or re-imposing capital controls to maintain adequate control over exchange rates and domestic interest rates.
Such heterodox policy programmes would require up-front debt restructuring given the debt load of many countries in the Arab region, in order to open the possibility and mobilize the resources to support national development strategies that open up political space and re-shape the terms of relation with external financiers.
Montes questioned whether Arab countries in the post-dictatorship context are facing “choiceless democracies”. Under such a context, even though a democratic processes is introduced, the choices for economic programmes are still deeply limited. Thus, the policy agenda carried out is often a continuation and acceleration of the old government’s agenda, even though the old rulers have already been overthrown.
On the way forward, Montes argued that the alternative to fast growth associated with greater inequality and higher or more vulnerable unemployment is slower but sustained growth, with less vulnerable employment, less subject to cyclical and volatile booms and busts, and more protection of the livelihoods of the poor and the middle classes. Such growth protects domestic policy space and permits the government to implement policies to protect employment and simulate investment in new more productive jobs. Montes reminded the participants that experience in the past showed that the cost of the bust (which also lasts many more years) exceeds the benefits from the boom. For example, twelve years after the financial crisis, Southeast Asian investment rates have not recovered the levels they averaged before the crisis.
Montes concluded by noting that there are alternative policies, but only a genuinely functioning democracy, based on a social contract of accountability and dialogue with citizens, would allow such alternative policies to emerge.
Isabel Ortiz, Director of the Global Social Justice Program at the Initiative for Policy Dialogue, presented a the paper co-authored with Matthew Cummins, titled ““The Age of Austerity – A Review of Public Expenditures and Adjustment Measures in 181 Countries.”
Ortiz stated that contrary to public perception, austerity measures are not limited to Europe; in fact, many adjustment measures feature most prominently in developing countries. According to IMF data (WEO October 2012), 119 countries will be adjusting public expenditures in 2013, increasing to 131 countries in 2014 and the trend will continue at least until 2016.
She noted that there are two main phases of the global crisis. In a first phase (2008-09), most governments introduced fiscal stimulus programs and ramped up public spending. However, premature expenditure contraction became widespread in 2010, despite vulnerable populations’ urgent and significant need of public assistance.
Fiscal contraction is most severe in the developing world. Moreover, comparing the 2013-15 and 2005-07 periods suggest that a quarter of countries are undergoing excessive contraction, defined as cutting expenditures below pre-crisis levels.
In terms of population, austerity will be affecting 5.8 billion people or 80% of the global population in 2013; this is expected to increase to 6.3 billion or 90% of persons worldwide by 2015.
Regarding austerity measures, a review of 314 IMF country reports published between January 2010 and February 2013 indicates that governments are weighing various adjustment strategies. These include: (i) elimination or reduction of subsidies, including on fuel, agriculture and food products (in 100 countries); (ii) wage bill cuts/caps, including the salaries of education, health and other public sector workers (in 98 countries); (iii) rationalizing and further targeting safety nets (in 80 countries); (iv) pension reform (in 86 countries); (v) healthcare reform (in 37 countries); and (vi) labor flexibilization (in 32 countries).
One of the most alarming trends in austerity policies worldwide is that of subsidy reduction and elimination, even in a global context of high food prices. The report highlights that subsidy reduction, primarily in fuel but also in electricity, food and agricultural inputs like seeds, fertilizer and pesticides that can sustain local production, is being discussed in 100 countries (78 developing and 22 high-income).
However, if basic subsidies are withdrawn, food and transport costs increase and can become unaffordable for many households. Higher energy prices can also contract economic activities. Increased hunger and malnutrition has irreversible impacts on children. Ortiz recalled that in recent years, food protests have erupted in Algeria, Bangladesh, Burkina Faso, Egypt, India, Iraq, Jordan, Morocco, Mozambique, Nigeria, Senegal, Syria, Tunisia, Uganda and Yemen, to name but a few.
Wage bill cuts/caps: As recurrent expenditures like salaries, tend to be the largest component of national budgets, an estimated 98 governments in 75 developing and 23 high-income countries are considering to reduce the wage bill, often as a part of civil service reforms. This policy stance may translate into salaries being reduced or eroded in real value, payments in arrears, hiring freezes and/or employment retrenchment, all of which can adversely impact the delivery of public services to the population.
Ortiz stressed that 94 countries (63 developing and 31 high-income) are considering options to boost revenue by raising Value-Added Taxes or sales tax rates or removing exemptions. However, increasing the cost of basic goods and services can erode the already limited incomes of marginalized groups and stifle economic activity. Since this policy does not differentiate between consumers, it can be regressive, shifting the tax burden to families in the bottom income quintiles of society and exacerbating inequalities. Alternatively, progressive tax approaches should be considered, such as taxes on income, inheritance, property and corporations, including the financial sector.
Pension reforms are being considered in 86 countries (47 developing and 39 high-income) and involve measures such as raising pension contribution rates, increasing eligibility periods, prolonging the retirement age and/or lowering benefits.
Health system reforms are taking place in 37 countries (12 developing, 25 high income), involving the increase of fees and co-payments paid by patients along with cost-saving measures in public health centers. The main risk of these two adjustment measures is straightforward: vulnerable groups are excluded from receiving benefits or assistance is diminished at a time when their needs are greatest.
Ortiz also noted that 80 countries (55 developing and 25 high-income) have been rationalizing or further targeting social safety net systems. The IMF’s policy advise generally associate targeting social programs to poverty reduction, including in countries with large populations below the poverty line, where the logic of targeting to the poorest of the poor is weak. Overall, policymakers should consider that, in times of crisis, it is important to scale up social investments instead of scaling down. A strong case can be made to extend a social protection floor for children, elderly, persons with disabilities, and other vulnerable groups.
Labor flexibilization reforms: At least 32 governments are considering reforms, eroding workers’ rights. Labor market reforms are aimed at increasing competitiveness and supporting business in the context of recession, compensating for the underperformance of the financial sector. However, labor market flexibilization will not generate decent jobs; on the contrary, in a context of economic contraction, it is likely to generate labor market “precarization,” depress domestic incomes and ultimately hinder recovery efforts.
The United Nations 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.
It is imperative that policymakers recognize the high human and developmental costs of poorly designed adjustment strategies and abandon the myopic scope of macroeconomic and fiscal policy decisions and, instead, consider alternative policies that support a recovery for all persons.
The paper, which is co-published by IPD and the South Centre, is available at this site: http://policydialogue.org/files/publications/Age_of_Austerity_Ortiz_and_Cummins.pdf.
(End of Part I)