The Age of Austerity

15 July 2013 by Isabel Ortiz , Matthew Cummins


A Review of Public Expenditures and Adjustment Measures in 181 Countries

This paper [1] examines the latest IMF government spending projections for 181 countries by comparing the four distinct periods of 2005-07 (pre-crisis), 2008-09 (crisis phase I: fiscal expansion), 2010-12 (crisis phase II: onset of fiscal contraction) and 2013-15 (crisis phase III: intensification of fiscal contraction); reviews 314 IMF country reports in 174 countries to identify the main adjustment measures considered in high-income and developing countries; discusses the threats of austerity to development goals and social progress; and calls for urgent action by governments to adopt alternative and equitable policies for socio-economic recovery.

Age of Austerity Ortiz and Cummins

In a first phase of the global economic crisis (2008-09), 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 a second phase of the crisis, despite vulnerable populations’ urgent and significant need of public assistance. In 2013, the scope of public expenditure consolidation is expected to intensify significantly, impacting 119 countries in terms of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
, and then steadily increase to reach 132 countries in 2015. The latest IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
projections suggest that this trend will continue at least through 2016.

One of the key findings of this 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 2013-15 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 desk review of IMF country reports published since 2010 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 of safety nets (in 80 countries); (iv) pension reform (in 86 countries); (v) healthcare reform (in 37 countries); and (vi) labor 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). Contrary to public perception, austerity measures are not limited to Europe; in fact, many of the principal adjustment measures feature most prominently in developing countries.

This paper questions if the projected fiscal contraction trajectory—in terms of timing, scope and magnitude—as well as the specific austerity measures being considered are conducive to socio- economic recovery and the achievement of development goals. The worldwide propensity toward fiscal consolidation can be expected to aggravate the employment crisis and diminish public support at a time when it is most needed. The costs of adjustment are being thrust upon populations who have been relentlessly coping with fewer and lower-paying job opportunities, higher food and fuel costs, and reduced access to essential services since the crisis began. In short, millions of households continue to bear the costs of a “recovery” that has largely excluded them. This paper encourages policymakers to recognize the high human and developmental costs of poorly-designed adjustment strategies and to consider alternative policies that support a recovery for all.



Isabel Ortiz is Director of the Global Social Justice Program, Initiative for Policy Dialogue, Columbia University.
Matthew Cummins is an economist who has worked at UNDP, UNICEF and the World Bank. Comments may be addressed by email to the authors at isabel.ortiz@ymail.com and matthewwcummins@gmail.com.

Footnotes

[1This version of “The Age of Austerity” is an updated version of that published 13th April 2013. By popular demand, the authors have expanded table 1 (indicating the number of countries contracting, by region and income group).

Isabel Ortiz

Isabel Ortiz is Director of the Global Social Justice Program, Initiative for Policy Dialogue, Columbia University.

Other articles in English by Isabel Ortiz (2)

Matthew Cummins

Matthew Cummins is an economist who has worked at UNDP, UNICEF and the World Bank.

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