Debunking Austerity Archives

Despite its new rhetoric, the IMF still promotes failed policies

An event titled Income Inequality Matters: How to Ensure Economic Growth Benefits the Many and Not the Few is not exactly what comes to mind when one thinks of the International Monetary Fund (IMF).

Yet, in April, at the latest Spring Meetings, managing director Christine Lagarde, along with the IMF’s chief economist, discussed the urgency of addressing rising income inequality and the need for redistributive policies. While IMF staff in Washington were expressing their concern with inequality, people in Ecuador, Argentina and Tunisia were taking to the streets to protest against anti-worker austerity policies their governments are implementing as part of the IMF programs.

In the 1980s and 1990s, when a series of debt crises plagued the developing world, the IMF lent money to those countries as part of what it called structural adjustment programs (SAPs). These programs, part of what is now referred to as the ‘Washington consensus’, aggressively promoted an agenda of liberalization, deregulation, and privatization, along with sharp cuts to social spending.

SAPs protected creditors and opened the doors for multinational corporations to do business in these countries, while the brunt cost of the adjustments was borne by people.

As the growth and development that was promised as a result of these programs never materialized, the IMF slowly lost some of its influence. The painful memories of the social costs that resulted from SAPs have made the IMF an extremely unpopular institution.

In recent years, the IMF has made substantial efforts to rebrand itself and create the image of an institution concerned with inclusive growth and social indicators. The IMF’s research department has dedicated a significant amount of time and space to the issue of rising inequality. This included research that showed that the fiscal consolidation and liberalization of capital accounts – policies that are at the core of IMF programs – increase income inequality.

The Fund has also examined the effect of the labor market policies it promotes and their contribution to the decline in the share of income captured by labour.

Yet, while its research department tackled questions on how to pursue both growth and inclusion, the Fund’s loan programs have not incorporated these concerns.

In the aftermath of the financial crisis in 2008, the IMF re-emerged as a major player on the global scene. The IMF stopped using the name SAP, but the structure of IMF loan conditions and the policy demands remained very similar, with the failure of previous programs all but forgotten.

To make matters worse, the IMF continues a trend of underestimating the depth of recessions caused by the austerity policies it promotes, which prolongs economic crises and increases debt burdens as economies shrink.

The IMF’s latest loan agreement with Ecuador has the typical features of a structural adjustment program. It demands massive cuts in government spending, which directly target public sector employees, along with a series of neoliberal institutional reforms.

The program continues to impose failed policies that are shown by the IMF’s own research department to increase inequality and have high social costs.

To go along with the IMF’s new image, the program does include a floor on social spending, along with a modest increase in spending on social assistance for the first year. However, the spending floor, which establishes a minimum amount of the budget to be allocated towards social assistance programs is set at a low level, which is unlikely to keep up with the increased needs that will arise from Ecuador’s recession.

The case of Argentina, which entered an agreement with the IMF in the summer of 2018, has already shown the inadequacy of social spending floors. As the economic crisis has continued to worsen throughout the program, poverty in Argentina has skyrocketed, increasing from 25.7 percent in mid-2017, to 32 percent by the end of 2018, a staggering 6.3 percentage points.

Argentina also serves as an example of the failure of IMF austerity programs, where growth projections had to be adjusted downwards by over 3 percent for a single year only 3 months after the initial agreement was signed

An in-depth study of all IMF loans approved in 2016 and 2017 has shown that 23 out of a total of 26 programs imposed austerity measures. The number of conditions attached to loans also continues to increase. Furthermore, the study has shown the inadequacy of social spending floors, which do not provide enough funding, even for the provision of basic healthcare.

The IMF has changed its rhetoric on inequality and social inclusiveness, but its operations continue to impose the same harmful policies of the past. While some symbolic steps have been taken on how to operationalize research on inequality, they have yet to be incorporated into lending agreements.

If the IMF is truly concerned about growth that benefits ‘the many,’ it needs to stop promoting policies that have time and time again hurt working people.

This article originally appeared in Equal Times.

Puerto Rico’s Colonial Legacy and its Continuing Economic Troubles

When Puerto Rico was hit by Hurricane Maria, the island was ill-equipped to handle the storm that claimed thousands of lives and devastated most of the island’s infrastructure, leaving it in the dark for months. Prior to the storm, Puerto Rico’s economy had already experienced two decades without economic growth, a rare occurrence in the history of modern capitalism. Neither a sovereign country nor a US state, Puerto Rico has had constrained ability to respond to negative economic shocks, while only receiving limited federal support. The island’s prolonged economic failure resulted in the accumulation of an unsustainable debt burden, and Puerto Rico’s bankruptcy.

Puerto Rico became a territory of the United Stated in the aftermath of the Spanish-American War of 1898. While residents of Puerto Rico were given US citizenship in 1917, they still cannot vote in US presidential elections on the island and have no voting representation in the US Congress. The UN officially removed the island from its list of colonies in 1953 after the US Congress approved a new name, the “Commonwealth of Puerto Rico,” along with a constitution that granted the island authority over internal matters.

Despite this semblance of autonomy, Puerto Rico continued to be subject to the Territory Clause of the US Constitution, which grants the US Congress “power to dispose of and make all needful Rules and Regulations.” Recent developments have shown beyond doubt that Puerto Rico continues to be a colony, with the island now effectively ruled by a Federal Oversight and Management Board (the Board), created by the US Congress, which supersedes the authority of the island’s elected government.

After Puerto Rico defaulted on its $74 billion debt in 2015, the US Supreme Court struck down a bankruptcy law passed by the island. In 2016, the US Congress then passed the “Puerto Rico Oversight, Management, and Economic Stability Act” (PROMESA), to create a framework for Puerto Rico to restructure its debt. While many attribute Puerto Rico’s accumulation of unsustainable debt to irresponsible government spending, this narrative ignores the fact that much of what led to Puerto Rico’s prolonged economic failure was out of the island’s control.

During the last two decades of the twentieth century, Puerto Rico’s economy more than doubled in real terms as it became an attractive destination for US manufacturing, offering strong legal protections and relatively cheap labor. As the rules of the global economy were rewritten with the creation of the World Trade Organization and the passage of trade deals such as the North American Free Trade Agreement, Puerto Rico became much less attractive as a manufacturing hub.

The island’s economy has not registered any growth since 2005. Puerto Rico did not have the policy tools available to sovereign nations that could have allowed it to more effectively address the shifting global trade environment, e.g., by adjusting its exchange rate. Between 2005 and 2016, Puerto Rico’s economy was shrinking at an annual real rate of 1 percent per year. Investment, which was over 20 percent of GDP in the late 1990s, fell to less than 8 percent of GDP in 2016.

Furthermore, Puerto Rico did not receive the same federal support that US states do, meaning that as the economy worsened, its government had to foot the bill for a large share of social programs. Just in terms of health care, it is estimated that the Puerto Rican government has had to spend more than $1 billion per year more than it would have had it received the same reimbursements from the US federal government that states do.

By 2016, before Hurricane Maria, Puerto Rico had a poverty rate of 46 percent, and 58 percent for children, and had already lost 10 percent of its population to migration. With higher overall living costs than the mainland US, and lower incomes, many Puerto Ricans have chosen to leave the island and seek better opportunities on the mainland. In Maria’s aftermath, Puerto Rico is predicted to lose another 14 percent of its population by 2019.

As Puerto Rico’s economy declined, so did the revenues of the government, which increasingly financed operations through borrowing. Puerto Rican bonds were part of US municipal bond markets, and carried special tax exemptions that made them sufficiently attractive that buyers ignored the island’s macroeconomic reality ― something explicitly mentioned in Puerto Rico’s credit assessments. The bonds were only downgraded to “junk” in 2014 after Puerto Rico could no longer make interest payments on its debt.

PROMESA established a process to reach a consensus with creditors, and, were that to fail, it created a legal path to access bankruptcy court, where the Board would also represent Puerto Rico. As part of the consensus process, the board was tasked with certifying a 10-year fiscal plan that would keep the government operational, provide essential services to residents, adequately fund public pensions, and set funds aside for debt repayment in agreement with creditors.

The Board has taken an austerity approach that fails to address any of Puerto Rico’s long-term economic problems and is likely to exacerbate the downward spiral of economic decline and outmigration. In the aftermath of Maria, despite inadequate relief, the Board is using the increase in liquidity provided by relief funds to set aside more funds for creditors.

Yet many creditors continue to demand even harsher austerity, and the bankruptcy case is currently being heard by a bankruptcy judge in the New York District Court. Ironically, many of the most aggressive creditors are hedge funds that bought bonds at a steep discount after the default, and in the aftermath of Hurricane Maria.

To add insult to injury, the undemocratically appointed Board is setting aside $1.5 billion of the island’s budget for its own expenses, including legal and consulting fees for the next five years. Many of the advisors and lawyers now profiting from the bankruptcy process are the same actors who were involved in issuing the unsustainable debt. Meanwhile, island residents face pension cuts, layoffs, benefit freezes, and school closures. Given that the people of Puerto Rico have no democratic representation or say in this process, it is not surprising that their colonial rulers are ignoring their needs.

This article was originally written for the UN Conference on Trade and Development (UNCTAD) and INET YSI Summer School 2018.

Austerity in the UK: Senseless and Cruel

As the UK recorded its first current budget surplus in 16 years, the IMF was quick to use this development as sufficient proof to declare the austerity measures, imposed by the UK government in the aftermath of the financial crisis, a success. To the IMF, the UK case of eliminating its budget deficit, while avoiding a prolonged recession, and faring better than other European countries, supports the case for further austerity.

However, this overly simplistic interpretation disregards the long-term structural problems that the UK economy is facing, does not acknowledge the active role played by the Bank of England (BoE) in mitigating the crisis, nor does it attempt to understand what is behind the growing voter discontent that led to the Brexit vote. Furthermore, given that the austerity measures have been linked to 120,000 deaths, it seems rather odd to celebrate this approach.

While at a first glance, one might think the UK economy is in pretty good shape, with low unemployment levels and continuous growth for the last 8 and a half years, a closer look at the data reveals a less optimistic picture. As outlined in this report from the Center for Economic and Policy Research (CEPR) that I co-authored with Mark Weisbrot, the UK economy is facing some serious challenges.

The last decade has failed to deliver any improvement in living standards to most households, with real median incomes of working-age households barely returning to their pre-recession levels this year. Retired household have fared somewhat better, yet are under threat as a target for further spending cuts. While increased employment has meant household incomes reached their precession levels, real hourly wages have not. To make matters worse, a widely cited decline in the gender pay gap is due to a larger drop in male wages, rather than female wages increasing.

One of the most striking and unusual aspects of the recovery is that poverty, by some measures, has actually increased for people of working age. After accounting for housing costs, the percentage of people aged 16–64 with income below the poverty threshold has risen to 21 percent in 2015/16, from 20 percent in 2006/07.

In terms of productivity growth, which is the engine of rising living standards, the past decade has been the worst for the UK since the 18th century. The slowdown in productivity growth means that GDP per person is about 20 percent lower than it would have been if the prior growth trend continued. The problem of slow productivity growth is directly linked to low investment levels in the UK, which has the lowest rate of gross capital formation amongst G7 countries.

The UK currently finds itself in an economy where demand is lagging, and the prospects of Brexit bring significant uncertainty over the future. This is an environment that is unlikely to attract major private investment, especially in the areas it is most needed. There is a clear need for public investment and spending that can grow the economy and improve living standards. More austerity might seem to reduce the government’s deficit now but its price will ultimately be paid through lost output and slower growth.

The negative feedback from the fiscal tightening was undoubtedly mitigated by the expansionary monetary policy conducted by the BoE, which also explains why the UK was able to withstand austerity without deepening its recession and fared better than countries in the eurozone. The BoE started lowering its Bank Rate in October 2008 until it reached 0.5 percent. The rate was further decreased in the aftermath of Brexit to 0.25 percent, only to be raised again to 0.5 percent at the end of 2017.

The most important step taken by the BoE was its Quantitative Easing program, launched in August 2008, to buy bonds and ensure long-term interest rates for the UK remain low. The European Central Bank (ECB) only took similar steps for euro denominated sovereign bonds in July 2012.

While the IMF portrays the UK net public debt-to-GDP ratio as unsustainable high (it was 80.5 percent in 2017), this assessment is mostly arbitrary, especially given the UK’s specific circumstances. The burden on the public debt is best measured by the interest payments on the debt, relative to the size of the economy since the principal is generally simply rolled over. At present, the net interest payments on the debt are about 1.8 percent of GDP, a number significantly lower than in the 1980s when interest payments on the debt were generally above 3 percent of GDP annually, and in the 1990s when they were between 2 and 3 percent per year.

It is essential to note that financial markets recognize there is little risk to holding UK bonds, and the UK government can currently borrow at negative real interest rates. Given that the UK issues bonds in its own currency, investors understand there is no risk of default.

There are many public investments that have a positive real rate of return by increasing the productivity of the economy. Thus, given the current circumstances, it seems rather absurd to focus on reducing the debt rather than growing the economy.

There is no doubt that Brexit is one of the major challenges that the UK faces. However, particularly in this context of uncertainty, macroeconomic policies play an essential role. Unnecessary fiscal and monetary tightening pose an immediate threat to economic progress and the UK’s ability to improve living standards of its residents.

Imposing austerity on an economy where incomes have not recovered from the last recession, there is a large slowdown in productivity growth, an overall lack of investment, and the government can finance its spending at negative real interest rates is senseless and cruel.

For more details, graphs, and complete sources check out the full report.