TWN Info Service
on Finance and Development (May10/03)
Global Trends by Martin Khor
From fiscal stimulus to austerity policies
For many countries that have over-borrowed
to spend their way out of recession, the limits of fiscal stimulus have
been reached, as
For the last 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.
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 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.
The Keynesian counter-cyclical medicine worked, and a recovery has taken place in several developed countries, so that GNP growth has turned from negative to positive.
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 requires there 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
The inability of
The initial package of 40-50 billion euros did not stem the loss of investor confidence, so a new package of 110 billion euros was put together and when this also did not work the European leaders and the IMF have now come up with a mega package of almost 1 trillion euros from which Greece and other European countries can draw from to avoid a financial meltdown.
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.
The strong street protests and strikes
have already begun, even before the policies are implemented, raising
the question whether
The new fear is that there will be contagion
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
And the new Treasury chief of the
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.