Ending the assault of austerity and procyclical policy stance

‘The world is confronting multiple, compounding crises, from Covid-19, energy, inflation, debt, and climate shocks to unaffordable living costs and political instability. The need for ambitious action cannot be greater.

However, the return of failed policies such as austerity, now called “fiscal restraint” or “fiscal consolidation,” and a lack of effective taxation and debt-reduction initiatives threaten to exacerbate the macroeconomic instability and daily hardships that billions of people are facing.

Unless policymakers change course, an “austerity pandemic” will make global economic recovery even more difficult.’ – An excerpt from a recent Project Syndicate (PS) published article ‘Ending the austerity pandemic’ by Isabel Ortiz, and Matthew Cummins

Pakistan is suffering from inflation and debt crises, made worse by the procyclical, and austerity policy stance of, for instance, the overboard monetary policy tightening by Federal Reserve of the United States contributed to capital flight from a number of developing countries, including Pakistan, on one hand, and the International Monetary Fund’s (IMF’s) strong programme conditionalities pushing procyclical, and austerity policies – reducing development spending at the back of stiff primary deficit reduction targets, and keeping policy rate at levels if inflation were mainly a aggregate demand-side driven phenomenon – when clearly inflation, like many developing countries has primarily been driven by global aggregate supply shock and weak market governance domestically.

On the contrary, however, austerity policies have overall contributed to inflation through pushing up cost-push and imported inflationary components of inflation. Moreover, the fact that austerity policies have been pursued in a procyclical manner, that is, in a downturn, adds significantly to the economic misery.

Instead, non-austerity policy framework, and counter-cyclical policy approach should be adopted. A general mistake that is made in supporting the austerity drive is that it is seen as a ‘belt-tightening’ act of curtailing low-priority public expenditures in terms of public good delivery.

Here, austerity is taken in the same light as efforts to increase the efficiency of public expenditures – like lowering unnecessary current expenditures in running the machinery of public sector – while austerity deals with efforts to curtail aggregate demand, and restrict spending to reduce aggregate supply, where higher cost of capital and lower economic growth as a consequence leaves little for even spending enough to improve the public sector capacity, in turn, need as an important determinant to increase the efficiency of public expenditure in the first place.

Hence, while efficiency of public expenditure should be improved, subscribing to austerity leads to economic misery, and in the context of existential threats, does not allow reaching a much-needed resilient and inclusive economy.

In her recently published book ‘The capital order: How economists invested austerity and paved ways to fascism’ Clara E. Mattei while thoroughly discussing the topic of austerity, pointed out the following: ‘Call it the austerity effect: the inevitable public suffering that ensues when nations and states cut public benefits in the name of economic solvency and private industry.

While austerity policies may not be identified by name, they underscore the most common tropes of contemporary politics: budget cuts (especially in welfare expenditures such as public education, health care, housing, and unemployment benefits), regressive taxation, deflation, privatisation, wage repression, and employment deregulation. Taken together, this suite of policies entrenches existing wealth and the primacy of the private sector…’

The two major existential threats facing humanity, and where the first contributes strongly to the latter threat, fast-unfolding climate change and still ongoing pandemic, need greater economic institutional quality – through greater regulation and capacity of the public sector for both its own better performance, including appropriately protecting the rights of the public, and also making the private sector in general to look beyond quick profits – and also much larger public and private investments so that the goal of a much-needed inclusive global economy can be achieved.

On the contrary, however, procyclical and austerity policies have not only significantly shrunk a particular developing country’s own fiscal space, but the practice of the same at the global level has meant that it has become very difficult to retain capital, and keeping domestic export industry competitive in the wake of high borrowing costs, and high imported inflation keeping import cost of raw materials and machinery for the export industry.

An overboard monetary tightening under the overall procyclical/austerity policy mantra has become difficult in making finance available to make needed investments in both making the green economic transition and in reducing climate-caused disaster impact, but also in public health sector preparedness against a pandemic shock.

Hence, economics Nobel laureate, Joseph E. Stiglitz has indicated that overboard monetary tightening policy will likely push the global economy overall into recession in 2023. He pointed out in this regard in his recent PS published article ‘The road to fascism’ as: ‘Most importantly, the US Federal Reserve may raise interest rates too far and too fast.

Today’s inflation is largely driven by supply shortages, some of which are already in the process of being resolved. Raising interest rates therefore might be counterproductive. It will not produce more food, oil, or gas, but it will make it more difficult to mobilize investments that would help alleviate the supply shortages. Monetary tightening also could lead to a global slowdown.

In fact, that outcome is highly anticipated, and some commentators, having convinced themselves that combating inflation requires economic pain, have been effectively cheering on the recession. The quicker and deeper, the better, they argue. They seem not to have considered that the cure may be worse than the disease.’

Therefore, it is of utmost importance that austerity policies are immediately done away with in domestic public policy, and under policy through process and conditionalities of multilateral institutions like IMF.

A recent ‘Third World Network’ published a series of article under the overall theme ‘The austerity assault’ in its publication ‘Third World economics: trends & analysis’. In one of the articles ‘A looming debt crisis is threatening global health security’ pointed out: ‘Austerity will mean dangerous reductions in health expenditure. To even restrain the damage will require a systemic re-prioritization of public resources towards health systems.’

Another article ‘End austerity: budget cuts in 2022-25 and alternatives’ in this series highlights the findings of a recently published report ‘End Austerity: A Global Report on Budget Cuts and Harmful Social Reforms in 2022-25’ by ‘European Network on Debt and Development’ (Eurodad), and not only highlights the dangers of following an austerity policy, but also how this pushes a country into suffering from a neoliberal assault.

The article highlighted in this regard: ‘Rather than investing in a robust post-pandemic recovery to bring prosperity to all citizens, governments are considering austerity measures that will harm populations. These adjustment measures are not new: the same policies have been advised over the years by the international financial institutions (IFIs). Austerity is an outdated policy that has become the “new normal”, an IFI strategy to minimize the public sector and the welfare state in order to support the private sector.

Countries constrained by debt and deficits are told to adopt. fiscal consolidation or austerity measures rather than identify new sources of fiscal space. Once budgets are contracting, governments must look at policies that minimize the public sector and expand PPPs and the private delivery of services, often promoted and/or assisted by multilateral development banks. These policies principally benefit corporations and the wealthy – they are “pro-rich policies” that exacerbate inequalities.’

This is indeed all too familiar in the case of Pakistan, and it is important to break away from this damaging pathway for both the economy, and the quality of democracy. In the same book, Clara E. Mattei highlights as to why countries continue to practice austerity, even when they do not see its results, - like Pakistan, both being in an IMF programme, or through public policy inclination otherwise as well, continues to practice austerity policies over the last three-and-a-half decades or so – as ‘In his famous book Austerity: the history of a dangerous idea, the political scientist Mark Blyth shows that although austerity has not “worked” in the sense of achieving its stated goals across history… it has nonetheless been employed by governments over and over again… [and he] refers to this pattern of compulsive repetition as madness.

However, if we view austerity in this book’s terms… we can begin to see method in the madness: austerity is a vital bulwark in defense of the capitalist system.’

Copyright Business Recorder, 2022