From fiscal stimulus to austerity policies
Martin Khor
For many countries that have
over-borrowed to spend their way out of recession, the limits of fiscal
stimulus have been reached, as Greece and other European countries have
shown.
For the past two years, the priority concern of many countries was to
counter recessionary forces that threatened to plunge their economies
downwards, with potentially big job and income losses.
Economic crisis, does Asia feel the jolts? |
The new “orthodox” policy was to have fiscal stimulus packages (a
boost to government spending) and easy monetary policies (low interest
rates and increased liquidity to the banking system).
This new orthodoxy was opposite to the Washington Consensus,
transmitted via the International Monetary Fund to developing countries
in times of crises, which preached government budget cuts and high
interest rates.
Through three decades of this economic consensus, developing
countries suffered these “pro-cyclical” policies which accentuated
rather than countered the recessionary tendencies, and that worsened and
prolonged the crisis. No wonder many of the countries called it the
“lost decades”.
When it was the turn of the developed countries to fall into deep
economic crisis, suddenly the Keynesian policies to counter recession
became not only the fashion but the rage again. Economic orthodoxy was
turned upside down in the home of the Washington Consensus itself.
The state, so vilified in recent years, became the commander again,
and trillions of dollars were spent in bailing out failed banks and
companies, as well as in pumping liquidity into the system to avert a
collapse, while interest rates went to rock bottom and government
spending ballooned.
In many developing countries which have the policy space and the
funds, similar Keynesian measures were taken, a combination of fiscal
stimulus and easy monetary policy.
The shock therapy seems to have worked in rescuing the financial
system as well as in stemming the sharp downward trend in GNP.
But in many countries where government debt is high, the limits of
fast government spending and easy money have been reached, and
dramatically too.
They are learning the hard way that servicing of government debt and
new loans for a growing government deficit require sufficient funds
either from investors in the market or through the “printing of money”
(the government lending to itself), and if there are insufficient funds
then a default situation looms.
This is the crisis that Greece is going through. As a member of the
eurozone, and with the government not having the authority to print
money or devalue its currency, the country has to depend on investors or
creditors to roll over existing debt and to provide new loans to fund
the current year’s budget deficit.
Still, many economic experts, writing in the Financial Times and
elsewhere, have assessed that although the amounts pledged to bail out
Greece may meet its credit needs for a few years, the debts of Greece
would still be growing and it would again be facing a default situation
at the end of two or three years.
The emerging view is that it is better to recognise this, and to
arrange upfront for an orderly debt workout in which creditors take a
“haircut” (agree to be paid back only part of the debt owed to them),
and the country is able to start again on a more sound footing.
Otherwise Greece will have to undergo a period of tremendous
austerity. Its announced policy package of salary and pension cuts, and
reduced spending, geared towards reducing the government deficit, is
predicted to have the economy in recession for some years.
The strong street protests and strikes have already begun, even
before the policies are implemented, raising the question whether Greece
will be able to sustain the required policies.
The new fear is that there will be contagion from Greece to other
weak European countries, such as Portugal, Spain and Ireland, and even
the United Kingdom is being talked about as a potential crisis country.
The one-trillion-euro package was quickly put together by European
leaders to prevent the potential of contagion from becoming a reality.
The countries are now embarking on austerity policies to avoid
becoming the next Greece. Last week, the Spanish Prime Minister
announced sweeping spending cuts of 15 billion euros including a 5%
reduction in public servants’ pay.
And the new Treasury chief of the United Kingdom, George Osborne,
pledged to accelerate spending cuts to reduce the government deficit
from its high 12% of GNP.
From the mantra of fiscal stimulus which was the rage of the last two
years, the new concern is to slash government spending and deficits, and
prove to the markets that the country is credit worthy.
What this means is that the developed countries can be expected to be
in a state of low growth or worse in the next several years, as the
Keynesian prop of increased government spending has reached its useful
limit and an exit policy is being sought for the fiscal stimulus.
For developing countries, the implication is that there are limits
too to the old model of export-led growth dependent on the rich
economies. Exports may still grow, but at a reduced rate. They have to
look more to themselves to fill in the gap left by reduced export
growth, and for the generation of demand to drive future development,
either their own domestic market, or their regional markets, and the
markets South-South across continents.
– Third World Network Features |